The United States faces a growing skilled labor shortage potentially more destructive to long-term economic health than the budget or trade deficits, an Economic Policy Institute report said Saturday.

The authors of the report, "Workforce Policies for the 1990s," predicted there would be millions of unskilled and economically dependent young people ill-equipped to participate in a modern economy.The study was written by former Secretary of Labor Ray Marshall and MIT economist Paul Osterman for the institute, a Washington think tank, which sent the report to President Bush and Secretary of Labor Elizabeth Dole.

The report urged the Bush administration to invest in an ambitious system of training and retraining for young people entering the workforce and for senior workers facing technological change and new work situations.

If Washington fails to act, the report warned, there will be a worsening of U.S. economic competitiveness that will be more destructive to the nation's long-term economic health than the budget or trade deficits.

The report also said that if the government does not address the problem, it will pay the price of increased welfare costs, growing prison populations and social strife in a society with declining economic opportunity and prosperity.

The first part of the report - a New Labor Market Agenda - was written by Marshall, who served as secretary of labor in the Carter administration and currently teaches economics at the University of Texas.

Marshall called for increased investment in education and training, expanded adjustment programs for displaced workers and greater institutional stability for labor market programs, including a revamped employment service.

Competitiveness means "being able to compete in the international markets on terms that . . . maintain and improve our real incomes," Marshall wrote.

By investing in the workforce, the economy will benefit from well-educated, well-trained, healthy and motivated people who can develop and use leading-edge technology, he said, adding that the alternative route is to compete by lowering wages and standards of living.

Osterman, who wrote the Possibilities of Employment Policies section of the report, said that the competitive pressures of a global economy demand employment and training programs that not only serve low income and disadvantaged workers but also provide services to train and retrain a broader labor population.

"We are moving into an environment in which product market and technological conditions will increase the frequency of job loss, even in the face of overall employment growth, and in which the labor force is growing increasingly ill-equipped to handle the rigors of changing employment," Osterman said.