The government is challenging employers to sign a pledge to improve the basic skills of their workforces.
Many of those lacking skills can get free training
Skills Envoy Sir Digby Jones said the lack of literacy and numeracy was a "shameful and unspoken secret".
The move came as a report argued that apprenticeships should be more employer-driven, with workplace training by an experienced mentor.
Shadow vocational education minister John Hayes said the present "top-down" system had devalued apprenticeships.
Skills Minister Phil Hope said the report was an insult to apprentices, employers and trainers.
Sir Digby said: "With seven million adults who are functionally illiterate and 11 million who cannot add up two three-figure numbers, the social and economic cost of an unskilled adult population is fundamentally damaging to Britain's chance of winning in the 21st century."
The "skills pledge" was launched at an event also attended by Chancellor Gordon Brown and Education Secretary Alan Johnson.
The pledge is to support all their employees to develop basic literacy and numeracy skills and work towards a full Level 2 qualification, equivalent to five good GCSEs.
There is to be a UK Commission for Employment and Skills, headed by Sir Michael Rake, currently international chairman of accountants KPMG.
Four new national skills academies were also announced, covering the glass manufacturing, coatings, print and building products; sport and active leisure; fashion, textiles and jewellery; and retail sectors.
A spokeswoman for the Department for Education and Skills said there were no sanctions on businesses that did not sign the pledge, but she added: "Employers that don't do this will be left behind."
The report on apprenticeships, Towards a Gold Standard for Craft, was written by Mr Hayes and lecturer Dr Scott Kelly and published by the Centre for Policy Studies think tank.
It said too many young people chose "not to develop their talents", with only 28% of school leavers in England and Wales enrolling on apprenticeships compared to roughly two thirds in Germany and Austria.
There were 1.25 million young people aged between 16 and 24 in September 2006 in the UK who were not in education, employment or training - an increase of 15% since 1997.
And the UK had a greater proportion of workers with low skills than competitor countries such as France, or Germany - where "business drives the apprenticeships system".
The current offering in schools had tended to emphasise the academic over the practical.
It involved "two misapprehensions" about vocational education: that it was primarily about re-engaging the non-academic, and that "parity of esteem" between academic and practical learning required the "academisation" of vocational subjects.
What was needed instead, the authors said, was a return to the practice in traditional apprenticeships, of workplace mentoring by a highly skilled and experienced craftsman.
Doing this would also revive the motivation "to acquire the kind of soft skills, such as punctuality, that employers say new recruits often lack".
Employer involvement should be a condition of public funding.
"At present apprenticeships are delivered by training providers, only 20% of whom are actually employers; there is no guarantee of substantial employer involvement."
Mr Hope said: "To say that apprenticeships are 'devalued' is an insult to the many thousands of apprentices, their employers, and their trainers who are working hard to improve their skills.
"The truth is that apprenticeships are the primary vocational option for young people which is why we have trebled the number of apprentices in learning from 75,000 in 1997 to 250,000 today."
More than 90% of apprentices were in paid employment at the start of their training programme, and no apprenticeship could be completed unless they were employed.