Adressing the House of Commons in his Autumn Statement, Osborne said: "I also want to help any business seeking to employ a young person who is out of work.
"The Office for Budget Responsibility forecasts unemployment will rise from 8.1% this year to 8.7% next year, before falling to 6.2% by the end of the forecast.
"Youth unemployment has been rising for seven years and is now unacceptably high. The problem is - of course - primarily a lack of jobs.But it is made worse by a lack of skills.
"Too many children are leaving school after eleven years of compulsory education without the basics they need for the world of work.
"Our new Youth Contract addresses both problems, with the offer of private sector work experience for every young person unemployed for three months. After five months there will be weekly signing on. After nine months, we will help pay for a job or an apprenticeship in a private business. Some 200,000 people will be helped in this way.
"But as the Deputy Prime Minister has said - this is a contract.
"Young people who don't engage with this offer will be considered for Mandatory Work Activity, and those that drop out without good reason will lose their benefits.
"But if we're really going to change the economic performance of this country and tackle Britain decades long problems with productivity, then we have to transform our school system too - so that children leave school prepared for the world of work"