Investment in staff training is simply failing to keep up with increasing use of new technology, organisational change, new approaches to managing people and the development of new products and services.
The growing skills shortage is revealed in a new survey by the Learning and Skills Council. It poses a major challenge to colleges and other training organisations, says LSC chief Bryan Sanderson.
The survey, Skills in England 2002, shows 23 per cent of firms now report a skills gap, compared with 16 per cent the previous year.
An LSC spokesman said: "The report is a wake-up call for business. Skill gaps are limiting existing business effectiveness and threatening England's long term competitiveness."
While the drive for efficiency has increased the need to train staff in new ways of working, work-based training remains too focused on health and safety and induction.
Mr Sanderson said: "Employers need to play a greater role and look to the development of the existing workforce rather than the external labour market.
"Education and training providers (need) to become more innovative and flexible in meeting the demands of business."
Manufacturing is hardest-hit by skills gaps, with 24 per cent of firms reporting a significant problem. Small firms, with fewer than 10 employees, are the least likely to send staff on training off the job.
However, while participation in training at post-16 may be low compared with other countries, the workforce is reasonably qualified by international standards.
The report says: "The UK is now above the Organisation for Economic Cooperation and Development average in relation to the proportion of the workforce qualified to NVQ level 4-plus, and the UK now has one of the highest rates of university graduation in the OECD."
Nonetheless participation at the "intermediate level" - post-16 but below higher education - is too low, and too many graduates are "misplaced" in inappropriate roles.
The Confederation for British Industry says 47 per cent of firms intend to take on more graduates in the next three years, while 29 per cent will have fewer jobs for people with no qualifications.
The report was compiled for the LSC by the Institute for Employment Research.