Up to half of young people in England and Wales are out of work or under-employed, with the true scale of the problem being "hidden", council leaders have claimed.
The Local Government Association warned that a third of all young people will be jobless of "trapped" in under-employment by 2018 unless local areas are given more control over skills and training.
More than two million people aged 16 to 24 in England and Wales could be looking for work, or be under-employed in the coming years, the group warned.
The LGA said government figures centred on unemployment, not young people working part-time or are over-qualified for their job.
Youth unemployment appears to be falling, but there are over 730,000 more young people out of work or underemployed than in 2005, said the report - published ahead of the latest unemployment figures tomorrow.
The LGA complained of "complicated" national funding rules in England, which it said left young people leaving school or training with skills that didn't match local jobs.
Local authorities said the Youth Contract was underperforming and should be devolved to councils, while the government's flagship Work Programme should be commissioned locally.
Around two billion hours of young people's time is being unused, it was claimed.
Local authorities could help cut youth unemployment by a fifth, saving the taxpayer £1.25 billion, said the report.
Peter Box, chairman of the LGA's Economy and Transport Board, said: "It is simply unacceptable that we expect a third of young people to be underemployed in 2018 and it would be a travesty if young people were being left behind when the rest of the economy is growing and benefiting from this.
"We need to listen to the young people that are telling us that they want more work and not let them fly under the radar because of employment statistics that make us think the situation is improving.
"We know that the Government is investing a lot to help young people into employment. But councils know the reality of what is happening on the ground and our relationships with local people and businesses could be used much more than it is at the moment.
"We know how successful local organisations, such as councils, businesses and education providers, can be when working together and we would urge the Government to use this to its advantage and give us a say in the schemes that are aiming to get young people into work."
A Department for Work and Pensions spokesperson said: "Every day Jobcentre Plus advisers are getting young people off benefits and into work, and they already have the flexibility to work closely with councils to support local jobs programmes.
"The number of young people who are in work increased by 49,000 in the last three months, with the number claiming jobseeker's allowance falling for the last 20 months - but we know there is always more to do, which is why through the Youth Contract we have increased placements and provided addition funding to local authorities."
Shadow employment minister Stephen Timms said: "The LGA's report is further evidence of David Cameron's failure to tackle youth unemployment and under-employment. Under David Cameron's Government long-term youth unemployment has doubled, costing taxpayers a staggering £350 million a year, while the cost-of-living crisis has seen working people £1,600 a year worse off on average.
"Labour's jobs guarantee would mean every young person out of work for more than 12 months will be given a paid starter job, work they will have to take up or lose their benefits.
"Labour will work with local authorities to design a replacement to the Government's top-down Work Programme to ensure it is more closely connected to local businesses, charities and social enterprises to get people back to work."