This paper investigates the effect of capacity utilization on unemployment in Nigeria between 1981 and 2016 empirically leaning on the model employed by Asta & Zaneta (2010). The paper utilizes time series secondary data using two-stage least square regression techniques. The annual data utilized for the paper were regressed with E-views econometric package version 9. The results of the 2SLS analysis revealed that a positive relationship exists between capacity utilization and unemployment in Nigeria. The positive relationship is statistically significant at 5% level (P<0.05). This finding is contrary to the economic argument which underpins the intuition that the relationship between capacity utilization and unemployment is negative. The result shows that a 100% rise in capacity utilization leads to 3.4% increase in unemployment. The paperconcludes that government shouldinstitute policies geared towards productive employment as this would reduce the pace of unemployment and underemployment in the country.Furthermore, government’s focus should largely be concentrated on the micro, small and medium enterprises as these are the major drivers of employment growth in Nigeria as against the large scale businesses.