Britain’s network of jobcentres has become a hollowed-out “benefit administration service” that is shunned by employers and jobseekers alike, a cabinet minister has warned before a government overhaul of out-of-work support that will oblige young people to take up education or employment.

In an interview with the Observer, Liz Kendall, the work and pensions secretary, warned that the nation’s 650 jobcentres are no longer “fit for purpose” and need to become hubs for those looking for work or a better position, as well as those dependent on welfare. Reforms to integrate the jobcentre network with healthcare and careers services in England will be unveiled this week, as part of a long-awaited plan to deal with economic inactivity.

“Employers are desperate to recruit,” she said. “People are desperate to earn money and get on in their jobs. So we need big change. We need to see change in our jobcentres from a one-size-fits-all benefit administration service to a genuine public employment service. It’s not fit for purpose and it has to change.

“When only one in six employers use a jobcentre to recruit, that is a major issue. We’ve got to change the way we work to make sure employers want to use us and that people looking for a job have got the skills employers need.”

A serious image problem has left hundreds of jobcentres neglected by the vast majority of employers and avoided by those looking to find employment or a better post, according to a new government-backed analysis. It suggests that only a third of the public would use them for information about jobs.

The reforms will also see young people obliged to take up education or employment or face benefit sanctions. They come as the number of 16- to 24-year-olds not in either category is at its highest level in a decade and hurtling towards the 1 million mark. Any increase in the use of benefit sanctions will prove controversial within Labour, but Kendall said that the government’s attempts to improve access to medical services, careers advice and training had to be met by a willingness to take up the positions on offer.

“We are going to transform the opportunities for young people, including through early intervention to deal with mental health problems, with support in schools, with new work experience and careers advice,” she said, promising to provide “new opportunities” to young adults. “But young people will have to take that up. If you are out of work when you’re young and you don’t have basic skills, there can be lifelong consequences in terms of your earnings, your career and your health. We do not accept that – we will not write young people off. We will transform those opportunities, but young people will have a responsibility to take them up.”

The number of Neets – young people not in employment, education or training – now stands at 946,000, according to the latest data for July to September released last week. It marked an increase from 872,000 three months earlier and remains 20% higher than before the pandemic.

A government-commissioned survey seen by the Observer reveals the image problem facing jobcentres, with less than a third (32%) of the respondents saying they would use one for employment information.

Only about half (53%) trust the Department for Work and Pensions to provide an effective service to employers. A third of those using the department’s services feel that not enough support is given to people out of work.

The research comes before the Get Britain Working white paper, to be unveiled by Kendall this week. It marks part of the government’s efforts to lower the record 2.8 million people off work as a result of long-term illness, leading to growing welfare costs and denting Keir Starmer’s hopes of securing economic growth.

The cost of incapacity benefits has risen from £17bn before the pandemic to an estimated £29bn this year. It is projected to reach £34bn by the next election.

“We know that, yes, benefits can incentivise or disincentivise work – but it’s also about skills. It’s about childcare. It’s about balancing your work and family life. It’s a whole range of issues. We’ve got to bring all of that help and advice together in one place … [Jobcentre] work coaches who’ve worked for 25 to 30 years, they know what needs to change and we’re determined to back them.”

While Kendall described the transformation needed as “one of the biggest public service reforms that this government does”, the attempt to turn jobcentres into a new national jobs and careers service is backed by a modest £55m investment.

However, Kendall said that her task was directly linked to the government’s decision to prioritise the NHS in last month’s tax-raising budget.

“A healthy nation and a healthy economy are two sides of the same coin,” she said. “If you have a map of the country with the areas of high economic inactivity, worklessness or high poverty – my maps are exactly the same as [health secretary] Wes Streeting’s for poor health and low life expectancy.”