Nick Clegg will announce £1bn of new funding on Friday to help prevent another lost generation of young jobless people. The money, to be spent over three years, will provide opportunities including job subsidies, apprenticeships and work experience placements to 500,000 unemployed people.

The opposition said the move represented a U-turn and was in effect a revised version of Labour's future jobs fund, cancelled by the coalition government when it came to office.

After protracted negotiations inside the government, ministers will subsidise 160,000 work places by providing £2,275 to any private-sector business willing to hire an unemployed 18- to 24-year-old.

The scheme will be administered by private-sector providers via the government's work programme, and any young person taken on will have to complete the placement or be refused benefits. Anyone rejecting a subsidised job offer will be required to undertake four weeks' mandatory work activity.

Each subsidy is worth half the current youth national minimum wage and will last for six months. It will be available to all young people who have been on jobseeker's allowance for nine months. All employers will be expected to pay at least the minimum wage. The subsidy will more than cover the cost of an employer's national insurance.

The Liberal Democrats said the scheme was different from the future jobs fund since it will not operate in the public sector, provides a smaller job subsidy and may lead to permanent jobs.

Clegg said: "We won't allow the children brought up in the boom to bear the brunt of the bust. The next generation must not pay the price for my generation's mistakes. So the coalition government won't sit on our hands and let a generation fall behind."

The coalition refused to specify the source of the £1bn new money, but did not deny reports that the funding might come from a freeze in tax credits. The Treasury had been pressing for the money to come from a delay in the uprating of welfare benefits, excluding benefits for the disabled and pensioners. George Osborne, the chancellor, will set out the source of the funding in his autumn statement on Tuesday.

The deputy prime minister will also say that the £1bn will fund a further 250,000 work experience places to be provided over the next three years, adding to the 50,000 places announced so far. The places will be offered to every 18- to 24-year-old after three months' unemployment, but before they enter the work programme.

A further £50m programme will target 16- and 17-year-olds who are not in education, employment or training. The scheme will focus on the 25,000 most disengaged young people.

The announcement came as figures were published showing almost one in five 16- to 24-year-olds (1,163,000) are not in education, employment or training – an increase of 137,000 on this time last year. Clegg will say: "The aim of the Youth Contract is to get every unemployed young person working or learning again before long-term damage is done. This is a £1bn package and what's different about it is it gets young people into proper, lasting jobs in the private sector. But it's a contract, a two-way street: if you sign up for the job, there'll be no signing on for the dole. You have to stick with it. Youth unemployment is an economic waste and a slow-burn social disaster.

"If people are out of work when they're young they bear the scars for decades. If they have a false start, they might not ever fully catch up. These are tomorrow's mothers, fathers and taxpayers. If they end up falling behind, our whole society pays the price.

"It hasn't been easy to find £1bn but it is the right thing to do. We want to give every young person a reason to get up, a reason to go out, and a reason to feel great at the end of the day.

"Despite the huge pressures on the public purse we're pulling out all the stops. But young people have to meet us halfway. If you break your side of the bargain, don't just expect to live your life on benefits."

Reports that the funding may come from tax credits caused some surprise since the working tax credits are already being frozen for the next three years. Liam Byrne MP, the shadow work and pensions secretary, said: "You couldn't make it up. This Tory-led government has put up unemployment and is now proposing cuts to working families' tax credits to pay for a back-to-work scheme. But it's bankers' bonuses that should be paying to help get young people back to work, not working families."

Gavin Kelly, chief executive of the Resolution Foundation thinktank, said: "Doubtless the Treasury will have some wheeze up its sleeve for changing the indexing system for child tax-credits – perhaps by uprating in line with earnings for this year, not inflation. But if this is the case they will face the charge they have broken with the spirit of the key spending commitment they have made on helping low-income families with children.

"It's iniquitous because this will hit precisely those families who have already been on the end of the most severe squeeze of their lives."

Liberal Democrats pointed to the "huge amount of evidence of the 'scarring effect' of youth unemployment". The government cited academic research that identified a "wage scar" of 12%-15% at the age of 42 (dropping to 8%-10% if repeated spells of worklessness are avoided). The findings suggest someone who suffers unemployment at the point at which they enter the labour market suffers lower wages for 20 years.

Liberal Democrats said it had been a battle to persuade their Conservative allies to back a wage subsidy scheme, saying it has been "like getting a vegetarian to go and buy a kebab on a Friday night".