The number of firms finding it hard to recruit skilled workers has risen by 50% in a decade, figures suggest.
A survey of 6,000 businesses by the British Chambers of Commerce found 43% reported difficulties, compared with 29% in 1994.
Director general David Frost said employers were "frustrated" at young people "not equipped" with skills.
The government will respond to plans to reform secondary education - including vocational training - next week.
Former chief schools inspector Sir Mike Tomlinson is proposing a four-part diploma for 14 to 19-year-olds, to replace A-levels, GCSEs and equivalent work-based training.
If accepted by ministers, all diploma-holders will have to show a range of basic skills, including literacy, numeracy and IT competence. 'Failing'
There would also be clearer routes to vocational training.
Mr Frost said: "The system is simply not providing potential employees with the right skills for business and our figures show it has been failing for many years.
"The skills of our workforce are already lagging behind many of our global competitors.
"The government must implement lasting reform in its proposals next week or our competitive edge could be seriously harmed. Businesses cannot wait any longer."
A poll of CBI members last year found 37% were not satisfied with school leavers' English and maths skills.
And 46% were unimpressed by young people's "self-management" skills.
Shadow education secretary Tim Collins said the government was "strangling our long-term skills base".
"Ministers' preoccupation with getting 50% of young people into university is clearly not going to address the problem of building a high quality vocational alternative in the labour market," he added.
A Department for Education and Skills spokeswoman said: "The government has made progress on ensuring young people are equipped for the workplace.
"We have already widened the range of vocational GCSEs and A-levels on offer for the 14 to16 age group and around 60% of pupils are now working towards a GCSE in a vocational subject."
She added that the number of apprenticeships had "more than tripled" since 1997.
She also said: "We will shortly respond to Mike Tomlinson's recommendations on 14-to-19 reform, designed to stretch young people, reduce drop-out rates at age 16, and improve progression for those with vocational qualifications.
"Plus the forthcoming White Paper on skills will set out how we will further help employers to recruit and retain skilled people and support adult learners to gain higher skills and qualifications." BBC News