Globally, decline in employment has affected the youth more compared to other cohorts with youth in developing countries being particularly hard hit. There have been various interventions by the Kenyan government to address the challenge of youth employment through human capital development like the Youth Enterprise Development Fund (YEFD). Despite this, youth unemployment still remains a big problem making youth vulnerable to crime and social unrest. This paper investigated the nature, challenges and consequences of urban youth unemployment in Nairobi, Kenya. The results of this paper were obtained through a survey done in Mathare informal settlement July 2013. The respondents included unemployed urban youth and key informants. Sampling was through multistage cluster sampling for the youth while the key informants were selected purposively. An interview schedule was used to collect data from the youth and key informants through face-to-face interviews and focus group discussion respectively. The study established that most youth in Mathare were unemployed due to lack of education and necessary skills. Urban youth unemployment in Mathare informal settlement had led housing, prostitution, school dropouts, marginalization, rape, HIV/AIDS infections as well as early marriages. To address urban youth unemployment, the Kenyan curriculum should be tailored to ensure increased compatibility between work and training through offering more intensive courses. Participation in vocational training needs to be encouraged in order to promote youth enterprise development and self-employment.