This is a study on the main causes of urban youth unemployment in Iran. It argues that, based upon structural and classical explanations of unemployment, urban youth unemployment in Iran is caused by deficiencies in human capital development. Based in the two approaches to human capital development, the study uses empirical findings obtained through interviews, surveys and statistics in Iran to discuss earlier studies on the phenomenon, and to see whether investments in human capital development are satisfying in order to develop sustained economic growth. The paper looks at human capital development in the education system, with weight on tertiary education, and in established private companies. The main findings are that the strong increase in students to higher education is creating difficulties for the education system to facilitate the students, and that there is an unequal distribution of educational staff between state universities and the private Free Islamic Universities, resulting in problems with education quality. Education quality is especially a problem in the Free Islamic Universities, who are also suffering from financial difficulties, causing low technical qualities of the studies. However, at the same time the developments have been positive in the last years, and all of the universities are providing better statistical results now than in previous years. The positive development is especially seen in the share of students reading engineering and technical subjects, which opposite to humanities are considered crucial for employment and the economical growth of the country. Another positive development that is seen in this study is the conscious choice of subjects for students participating in a survey for this paper, and a generally positive attitude toward private sector, something that is opposite to arguments from state and organisation representatives interviewed. The positive attitude toward investing human capital in private sector is needed to avoid a large part of human capital being tied up to public sector, such as the situation is today. But even though future labour force, here in form of students, have a positive attitude toward private sector, there today exist a wide range of difficulties facing small and medium private enterprises through legal rigidities imposed by the state through the Labour Law and social security arrangements. These rigidities raise the real wage level of firms to such a level, that investment in the human capital than can develop entrepreneurship contains a very large risk, and demands strong economical backing. Thus, as long as the rigidities represents a problem for the firms, human capital development and further employment remains limited.