Ministers should reject calls to reverse employment tax increases as a way to boost jobs for young people in favour of extra funding for apprenticeships and increasing the number of youth support grants, according to a leading thinktank.

The Resolution Foundation said an in-depth study showed a cut in employers’ national insurance contributions (NICs) and a reduction in the minimum wage for under-21s – measures demanded by business groups – would do little to promote the chances of younger workers finding a job.

The independent thinktank said employers should have access to targeted workplace subsidies as “the most cost-effective way of supporting them to get young people into work”.

The report said that, unless action is taken, a high number of young people not in employment, education or training (Neets), which passed 1 million this year, risked scarring the living standards of a generation.

Last month, Alan Milburn, a former health secretary, presented the first part of a government-commissioned report on why an increasing number of people aged 16 to 24 have become Neets.

The Resolution Foundation’s report – entitled Take a chance on me – is expected to influence Milburn’s final recommendations when he publishes a follow-up report in the autumn.

Business lobby groups have complained that tax rises introduced by the chancellor, Rachel Reeves, since Labour returned to power have raised the costs of employment, with young people bearing the brunt of hiring freezes.

Last month, Cressida Hogg, the chair of the employer’s lobby group the Confederation of British Industry, said the minimum wage was fuelling youth unemployment by making it too expensive to hire people at the start of their careers.

In a separate intervention, the former prime minister Tony Blair said rises in the minimum wage for those under 25 years old would deter businesses from hiring younger people.

However, the Resolution Foundation said analysis of spending on a range of support for young workers showed reversing tax rises “would be wasteful and ineffective”.

The thinktank’s report said: “It has been argued that the 2024 changes to employer NICs put firms off hiring young people. But repealing them would have an underwhelming effect on youth employment – the vast majority of under-21s attract no employer NICs anyway.

“Scrapping employer NICs for under-25s entirely would be very expensive – costing £5.1bn and creating just 38,000 additional jobs for young people – at a wasteful ratio of £132,000 per job.”

Reversing increases in the minimum wage rates for younger workers would also have little effect on employment levels but significantly increase costs to the government, it said.

“The recent convergence between youth and adult minimum wage rates has prompted calls from some to reverse these changes. But the analysis finds this would have only a limited effect on employment – an additional 15,000 young people in work – while imposing a large cost on living standards, with the 230,000 16- to 20-year-olds that firms already pay the prevailing rate missing out on £379m a year between them,” the report added.

Researchers found that an increase to the youth jobs grant, which offers companies £3,000 to hire an 18- to 24-year-old who has been on universal credit (UC) for six months or more, would create 2,800 additional jobs at a cost of about £36,700 each.

It said the scheme, which launches this week, should be increased from 20,000 to 80,000 annual places, creating an additional 11,200 jobs a year.

The thinktank also recommended extending the jobs guarantee to young people claiming UC and looking for work for 12 months or more, to reach more 18- to 24-year-olds and limit apprenticeship levy to supporting workers under the age to 25.

“The economic case is stark: apprenticeships generate £13-£15 of public benefit per £1 spent for workers aged 19-24, compared with just £7 for those aged 24 and over.

“Furthermore, ringfencing the levy for under-25s last year would have freed up £1.55bn – enough to fund 145,000 young apprenticeships and provide the firms that take them on with an incentive of £2,000 each.”

Lindsay Judge, the thinktank’s research director, said the increase in Neets to more than 1 million was “a sobering milestone”.

She added: “But reaching for employer tax cuts to resolve this doesn’t add up. Instead, the government should scale up their most cost-effective programmes: more youth jobs grants, a broader jobs guarantee, and reforming the growth and skills levy so that it supports young people who would benefit from it the most.”