A radical rethink on higher education is needed and many universities should consider awarding more vocational qualifications, former trade minister Lord Digby Jones has said.
The ex-director general of the CBI says degrees do have value but that they are not the best option for all students.
UK universities are attracting record applications but firms often complain graduates do not have the right skills.
The body that represents universities has disputed Lord Jones' claims.
Nicola Dandridge, chief executive of Universities UK, said colleges already offered a wealth of vocational courses.
Lord Jones said courses need to deal with "the challenges of today".
Undergraduate applications to start university this September are up almost 12% on last year - despite the fact that there is an average of 70 graduates applying for each graduate level job.
Lord Jones told the BBC: "Too many universities have made a very quick progress to a place where actually today they are not too sure what they are there for and, of course, the world of work has changed.
"What the world of work needs out of universities has changed.
"A lot of them should look again and say 'could I link in earlier with people, could I link in with schools better, could I get local businesses in better, and then can I produce something where someone is better skilled to face the challenges of today which might not necessarily end with the word degree'."
Ms Dandridge said critics were wrong to attack universities, saying colleges were continuing to respond to courses required by the job market.
"What you tend to find is new courses are viewed with some suspicion by people who went to university some time ago," she said.
"But some of these new courses are actually just reflecting where the market is at.
"For example the digital economy is huge and creating lots of new types of university courses. Someone who's not engaged in that kind of world will think 'oh, well, that's a Mickey Mouse course', but actually that's where industry is at."
Statistically, graduates have better job prospects than non-graduates, and also go on to earn more over the course of their career.
But getting that crucial first job is becoming more and more difficult. Elizabeth Hayward, who graduated in entertainment management a year ago but still cannot find a job, said: "The whole talk in the sixth form was all about university really, nothing else apart from uni.
"And now as a result I feel like I have wasted £20,000 and all my time when I could be going straight to work and having no degree and maybe being higher up and working my way through the ranks with experience. Now I have a degree but can't get a foot in the door."
Shawn Brown, who decided university was not for him and started his own cleaning business with the help of a grant from the Bright Ideas Trust, said: "I think a lot of people do think having a degree is a guarantee for success and I don't think so.
"You have to have some ambition, some drive to go forward and really do something with that degree. Just having a a degree doesn't guarantee a job."
Carl Gilleard, from the Association of Graduate Recruiters, say high quality degrees are essential but agrees that they can be seen as the only option, when in many cases young people would be better off choosing another path.
"Perhaps there has just been too much emphasis on going to university," he said.
"For some people going to university is probably the wrong way to start their working life and careers."
However, university lecturers say it would be a huge mistake to discourage young people from studying for a traditional university degree.
Sally Hunt, the general secretary of the University and College Union, said the UK is competing with other major economies where the number of young people with degrees is rising.
"America, France, Germany just as examples, India as another - all of them are saying they want to have more graduates.
"They are doing that because they know that's how the wealth and security of their society is protected in the future.
"Why would we want to race to the bottom when what we should be doing is protecting what is one of the crown jewels of our country."
Universities minister, David Willetts, said degree providers will be required to give students more information about the kinds of jobs they are likely to get by taking certain courses.
"We believe in the coalition government that transparency, information, trusting people to take decisions is the best way forward."