This study examined the paradox of educated but unemployed graduates in Uganda, conceptualised through the theoretical lens of functional illiteracy — a condition in which individuals possess formal academic credentials yet lack the applied wisdom, soft skills, emotional intelligence, and adaptive competencies required to translate learning into productive and sustainable employment. Using a cross-sectional survey design, primary data were collected from 420 respondents drawn from graduate job-seekers, employers, and university lecturers across four urban centres in Uganda — Kampala, Gulu, Mbarara, and Mbale. Structured questionnaires and semi-structured interview guides were used as primary data collection instruments. Data were analysed at three analytical levels: univariate analysis provided frequency distributions and descriptive statistics of the study variables; bivariate analysis, employing Pearson's chisquare tests and Spearman's rank-order correlation, examined pairwise associations between graduate wisdom deficits, employer-rated employability, and graduate labour-market outcomes; and Structural Equation Modelling (SEM) with maximum likelihood estimation was applied to test a hypothesised conceptual model in which the wisdom gap mediated the relationship between educational attainment and graduate employability. Findings revealed that 68.3% of unemployed graduates were assessed as functionally illiterate despite holding bachelor's degrees or higher, and that the wisdom gap — indexed by deficits in critical thinking, emotional regulation, professional ethics, and contextual problem-solving — accounted for approximately 54% of the variance in employer-rated employability (R² = 0.54, p < 0.001). Structural Equation Modelling confirmed that the wisdom gap fully mediated the attainment-employability pathway (indirect effect = 0.61, 95% CI [0.48, 0.74]), rendering the direct effect of educational attainment on employability non-significant (β = 0.07, p = 0.41) once the mediator was modelled. These results indicate that Uganda's higher education sector produces graduates who are academically credentialed but vocationally unready, largely because curricula continue to prioritise content transmission over wisdom development. The study recommends the systematic integration of applied wisdom pedagogy into university curricula, structural reforms in graduate assessment frameworks, and establishment of employer-academia partnerships to co-design competencybased learning outcomes aligned with the realities of Uganda's labour market.