Deme, Franck and Naqvi (2005) showed that the increased government expenditure on education, training and skill acquisition leads to lower unemployment rate, expansion of the urban formal sector and the contraction of the urban informal sector. This was observed to be the case in Lesotho. The result is based on the two vital assumptions: public expenditure on education, training and skill acquisition should be very large; and the skill acquisition function is a rising step function. We present a general equilibrium model with perfect capital mobility to analyse the impact of government expenditure on skill acquisition on urban unemployment, the urban formal sector and the urban informal sector. We find that it is possible to derive the Deme, Frank and Naqvi(2005) result independent of the level of government expenditure and the nature of the skill function.