The report cites an ageing population as the key reason for the predicted shortfall, which is expected to have a massive impact on Australia's economy, Workplace Relations Minister Kevin Andrews said.
"The impact of the ageing of the population is not something that is happening in 10 or 20 years' time, it's something that is happening now," Mr Andrews said.
"It's something which we must continue to address if we are to sustain the economic growth of this country."
The federal Labor opposition is critical of the government for what it calls underinvestment in education and training- a policy oversite, it says, that will erode Australia’s international competativeness and productivity.
Mr Andrews released a new report by the Centre of Policy Studies at Monash University which said NSW would have the largest share of the forecast worker shortfall, while South Australia would suffer the greatest relative impact from an ageing population.
"The ageing of the population, coupled with an already tight labour market, especially for the more skilled occupations, will have significant implications for business," the report stated.
"Without sufficient skilled workers, many businesses will have difficulty in continuing to produce at their current level of output, let alone in expanding output."
The report also stated Australia's population was ageing rapidly.
"Over the next five years the estimated impact of population ageing is equivalent to a shortfall of 195,000 workers," the report said.
"In other words, while employment is expected to continue to grow solidly over the next five years, it is likely to be substantially less than it would otherwise have been if the population age structure were to have remained unchanged."
The report said the worker shortfall would strike within every industry but mining and manufacturing would be especially affected.