Lawyers meanwhile warned that firms could face claims for racial discrimination if they favoured British candidates over foreigners entitled to work in the UK.
The row broke after Work and Pension Secretary Iain Duncan Smith used a keynote speech in Madrid to appeal to firms to “give our young people a chance” rather than just handing jobs to foreign immigrants.
In his speech to the Foundation for Social Studies and Analysis think tank in the Spanish capital, Mr Duncan Smith blamed the “slack attitude” of the former Labour government to immigration for the increasing proportion of jobs taken by overseas workers.
He said that Government and business needed to work together to ensure the immigration system “works in the interests of Britain” and the unemployed are given a “level playing field” to compete for jobs.
“In the short term, controlling immigration is critical or we will risk losing another generation to dependency and hopelessness. But Government cannot do it all,” he said.
“As we work hard to break welfare dependency and get young people ready for the labour market we need businesses to play their part and give them a chance, and not just fall back on labour from abroad.
“If Government and business pull together on this, I believe we can finally start to give our young people a chance.”
The director general of the British Chambers of Commerce, David Frost, said employers were taking on foreign workers because they were better qualified and had a stronger work ethic than young British jobs applicants.
“They expect young people to come forward to them who are able to read, to write, to be able to communicate and have a strong work ethic,” he said.
“Too often that is not the case and there is a stream of highly able Eastern European migrants who are able to fill those jobs.
“They are skilled, they speak good English and, more importantly, they want to work.”
The CBI director for employment policy, Neil Carberry, said firms wanted to give young people an opportunity, but they had to pick the right candidate for the job.
“Tackling unemployment is a challenge for everyone, and businesses want to give young British people a chance,” he said.
“Employers should choose the best person for the job. The challenge is to ensure that more young Britons are in a position to be the best candidate.
“The Government’s focus should be on boosting private sector growth, which will deliver more job opportunities, and reforming our welfare and skills systems to make sure our young people are ready for work.”
The head of employment law at the law firm DBS, Paul Griffin, said employers could fall foul of anti-discrimination legislation if they favoured British job applicants.
“Any favouring of British workers above those from the EU or anywhere else if they have the right to work here, could make an employer liable for a claim for direct race discrimination under the Equalities Act,” he said.
“Iain Duncan Smith’s speech, whilst on the surface seeming positive, is actually a crude political act to scapegoat migrant workers for a lack of jobs.”
Labour Shadow Work and Employment Secretary Liam Byrne added that the numbers of jobs going to foreign workers had actually risen since Mr Duncan Smith and the coalition Government took office.
But Mr Duncan Smith received strong backing from Labour former minister Frank Field, who is now carrying out a review of poverty and life chances for the coalition.
He told BBC Radio 4’s The World At One: “Despite all the nit-picking, the crucial thing is that Iain Duncan Smith, on this issue, is speaking for the vast majority of people in this country.”