Employers are missing out on a generation of skilled workers and it is costing them billions.

A year after the Government announced its strategy to tackle unemployment among the over-50s, a report has warned the cost of ageism has risen to a staggering £31billion.

The number of people aged between 50 and 64 who are not in work has grown by 125,000 in the past two years, according to campaign group Employers' Forum on Age.

At the same time, unemployment in the UK has fallen to its lowest level for 20 years.

The Government was urged to help older workers improve their skills and encourage employers to develop a more enlightened approach to recruiting an age- diverse workforce.

Sam Mercer, the group's campaign director, said the Government had failed to meet many of its deadlines on tackling ageism despite signing-up to a European directive outlawing age discrimination by 2006.

He said: "The Government is acutely aware of the gravity of the problem and its concern has been heightened by the knowledge that the population is rapidly ageing."

One proposal being discussed is bringing an end to fixed retirement ages. The national retirement age is currently fixed at 65 for men and 60 for women. But workers could be given the option to delay retirement under laws to be introduced within five years.

Extending the working life of employees is seen as a way of tackling a shortage of skilled workers, especially in the IT industry.

Employment minister Tessa Jowell said older workers, women and unemployed people should be among those targeted to help meet the need for qualified employees.

By 2003, there will be an estimated 1.7million vacancies across Europe in the information technology sector, said Ms Jowell.

According to the latest Mori Captains of Industry poll, the skills shortage has replaced regulation, red tape and competition as the major concern for UK board rooms.