More than half of the developing world's workers are trapped in vulnerable jobs, working for themselves or in unpaid family work, according to a report that calls for better quality employment to drive economic growth.

The International Labour Organisation (ILO) also highlights an urgent need for 200m new jobs in emerging countries in its annual World of Work report. Without them, young people will be worst hit as youth unemployment rates soar even higher above the jobless rate for all adults, it warns.

The United Nations agency uses its flagship report this year to underscore what it sees as a link between secure, fairly paid work and more stable economic growth in developing countries.

Guy Ryder, ILO director general, said the research into more than 140 countries put paid to a long-held view that developing countries should simply concentrate on trade and investment liberalisation and infrastructure spending.

"Evidence presented in the report shows that such policies will not yield development unless accompanied by dedicated efforts to boost employment and decent work opportunities and tackle working poverty," he said.

"In countries where it was implemented, such a policy shift not only helped development but also played a counter-cyclical role that helped attenuate the impacts of the financial crisis."

The report welcomes an "impressive" reduction in working poverty, down to a third of total employment in developing countries from more than half in the early 2000s. But that meant that 839 million workers in developing countries still earned less than $2 (£1) a day.

Those countries that have tackled working poverty and vulnerable employment have reaped rewards in terms of rising living standards and stronger growth, the ILO says.

Among those where working poverty declined most steeply from the early 2000s, overall per capita income grew by 3.5%, on average, over 2007-12. For those countries that made least progress, the figure is only 2.4%.

Similarly, living standards improved faster in countries that have made the greatest investment in quality jobs from the early 2000s.

Countries that were particularly successful in reducing vulnerable employment during the early 2000s enjoyed "significant" economic growth after 2007. In those countries, per capita growth was almost 3% a year between 2007 and 2012, around one percentage point higher than in countries making the least progress on cutting vulnerable employment.

But despite those "positive trends", there were acute employment and social challenges in most emerging and developing countries, the report says, highlighting the near 1.5 billion people, or more than half the developing world's workers, in vulnerable employment.

"These workers are less likely than wage earners to have formal working arrangements, be covered by social protection such as pensions and health care or have regular earnings," said Raymond Torres, director of the ILO research department.

"They tend to be trapped in a vicious circle of low-productivity occupations, poor remuneration and limited ability to invest in their families' health and education, which in turn dampens overall development and growth prospects – not only for themselves but for generations to follow."

The problem is most acute in south Asia and sub-Saharan Africa, with more than three out of four workers in vulnerable forms of employment, and women disproportionately affected.

Repeating its warnings in previous reports about the burden on younger generations, the ILO highlights a youth unemployment rate of more than 12% in developing countries – more than three times the unemployment rate for adults. The highest youth unemployment rates are in the Middle East and North Africa regions, where nearly one in three young people in the labour force are unable to find work.

"Young women, in particular, are struggling to find work in these regions, with unemployment rates approaching 45%," said Torres.

The ILO is calling for decent work to be a central goal in the global development agenda after 2015, the expiry date for the millennium development goals.

"Economic growth is not sustainable when it is based on poor and unsafe working conditions, suppressed wages and rising working poverty and inequalities," said Torres.