Firms and charities are to be invited to bid for a payment-by-results scheme to try to get "Neet" teenagers into work or training, in a project launched by Deputy Prime Minister Nick Clegg.
The £126m scheme is aimed at 55,000 teenagers in England with poor qualifications who are currently not in education, employment or training.
Mr Clegg says it will help youngsters "into the world of work".
But Labour says the project is "too small and much too late".
Chris Keates, leader of the Nasuwt teachers' union, accused Mr Clegg of being responsible for an increase in Neets by scrapping the Education Maintenance Allowance.
'Ticking time bomb'
Mr Clegg described the problem of rising youth unemployment as a "ticking time bomb".
"Sitting at home with nothing to do when you're so young can knock the stuffing out of you for years," he said.
"We urgently need to step up efforts to ensure some of our most troubled teenagers have the skills, confidence and opportunities to succeed.
"Many of them will have complex problems: truancy, teenage pregnancy, a lack of GCSEs and health problems."
Mr Clegg said to see teenagers who have left school with no qualifications "slumped on the sofa in front of the telly is not only tragic for them... but it stores up huge problems for the future if we don't help them now".
He said it was also about getting "crucial early years in a child's life at school right" to "save on so much heartache later".
"If you start early it then allows children to start their school career with a sense of enthusiasm for learning," he said.
The scheme, part of the Youth Contract announced in the autumn, will invite bids for contracts worth up to £2,200 for each teenager who can be sustained in work, education or training for 12 months.
The target group will be 16- to 17-year-olds without any GCSEs at C grade or above.
The aim is for long-term savings from an early intervention.
Almost one in five young people aged between 16 and 24 are classified as Neet - with the most recent figure standing at 1,163,000.
This response from the government is aimed at teenagers at the lower end of this age range who are already at risk of "disengagement" from the world of work.
The organisations that win these contracts will have a free hand to decide their approach - with the emphasis on rewarding a successful outcome.
Payments will be staggered, so that the full amount will be paid only to contractors when young people have remained in work or training for a year.
The funding will reflect the highest level of Neet youngsters in this age group - with £14m available in the West Midlands, where 11.5% of 16- to 17-year-olds are in this category.
The project has been challenged by the ATL teachers' union, which accused the government of damaging the chances of teenagers "by dismantling the careers and advice service and abolishing the education maintenance allowance".
"We have deep misgivings that getting charities and businesses to provide support for unemployed youngsters outside the education system will undermine the likelihood of success," said ATL officer Adrian Prandle.
Shadow work and pensions secretary Liam Byrne also said the Youth Contract would not help most young unemployed people.
Mr Byrne said of Mr Clegg: "He promised big answers to the problem of youth unemployment yet what we have got today is something that won't help 95% of Britain's young unemployed.
"This is much too small and much too late to tackle a problem that is likely to cost our country £28bn over the next 10 years.
"The government needs to bite the bullet and put in place a sensible tax on bankers' bonuses in the next budget to help get 100,000 young people back to work."
Meanwhile, Work and Pensions Secretary Iain Duncan Smith has branded critics of the government's separate work experience scheme for young jobseekers as "job snobs".
The scheme offers unpaid work placements in stores such as Tesco and Maplin to 18- to 24-year-olds who have been unemployed for more than three months.
Mr Duncan Smith said in the Daily Mail: "The implicit message behind these attacks is that jobs in retail, such as those with supermarkets or on the High Street, are not real jobs that worthwhile people do.
"How insulting and demeaning of the many thousands of people who already work in such jobs up and down the country.
"I doubt I'm the only person who thinks supermarket shelf-stackers add more value to our society than many of those 'job snobs' who are pontificating about the government's employment policies."