One in three private sector firms are holding on to staff despite low levels of demand, a report from the Chartered Institute of Personnel (CIPD) has found.
Its latest Labour Market Outlook survey of more than 1,000 employers revealed that many businesses want to retain their skill base, but almost two thirds (62 per cent) said they would be forced to make job cuts if output or service delivery does not pick up in the next year.
The CIPD called it a 'make or break' moment for employers.
The findings may put an end to recent UK unemployment figures which have seen a gradual reduction since the beginning of 2012.
Latest figures from the Office for National Statistics (ONS) show that unemployment fell to 2.58 million people from the three months to May.
The CIPD's labour market adviser Gerwyn Davies said that although ONS figures suggest that the labour market is on a 'sound footing', the reality is a lot different.
"The tenacity with which employers are hanging on to skilled labour is a reflection of the high value they place on [skills] and the damage they fear will be done to their businesses if they are forced to start making more redundancies," he said.
"The spare capacity implied by the research suggests that firms are ready to increase their output quickly if demand grows. But there is only so long they can hold out for growth."
According to the CIPD's net employment balance - a measure of the difference between employers intending to increase staffing levels against those that intend to decrease them - found that it has remained positive during the last three months. Optimism is highest among smaller private sector firms (+46) compared to larger firms (+17), while the public sector remains negative (-36).
Elsewhere, the report found that employee pay will continue to be squeezed at 1.6 per cent, with average public sector pay awards (0.2 per cent) lagging behind those in the private sector (2.5 per cent).
Davies warned that the labour market was approaching a 'game-changing phase - one that could shape Britain's capacity to compete for a generation.'
"Private sector firms should be using any spare capacity they have to train, to innovate, or to focus staff in areas such as business development to help drive the medium-term prospects of their firm and the UK economy," he advised.