He now becomes the first Muslim councillor in the city's Conservative group.
Councillor Shah was originally a member of the Liberal Democrats and stood against Labour in 2010, before joining the party and getting elected the following year.
But he said he had moved to the Tories after becoming concerned at the way Labour was handling its cuts in Government funding by drawing up £123 million of savings and planning to axe 2,000 jobs.
Councillor Shah said: "Labour in Wolverhampton are dogmatic, inflexible, and wedded to the idea that you can tax and spend your way out of any difficulty.
"As time went by, I realised that Labour were politically incapable of concentrating resources on protecting statutory services
without gold-plating their pet projects first. I became convinced that they were almost looking
upon the changes to council funding as an opportunity to play a game of 'dare' with the Government, as in 'take us over if you dare'."
Conservative group leader Councillor Neville Patten welcomed Councillor Shah and said: "Many Labour supporters at all levels express their bemusement at what goes on up at the council. Some of them are sick to the back teeth of the dogma. Zahid's brave decision is unprecedented and shows exactly how bad things have got in this city because of Labour."
Paul Uppal, the Tory MP for Wolverhampton South West, said: "Instead of supporting the Government, all that the Labour-led Wolverhampton Council do is throw political mud and blame others for their own problems. It seems Councillor Shah – like many in the city – has seen right through their act. I am very glad to welcome him to the team."
Councillor Roger Lawrence, leader of the Labour party in Wolverhampton, said: "I am very disappointed. I've worked with Zahid and he has not raised these concerns with us. He's raised a few points about management numbers and we've been in agreement with him about that."