In its report the Assembly's Communities and Culture Committee said under Whitehall management young offenders in Wales are being unfairly locked up and demonised.
Among its 28 recommendations the committee called for the Welsh government to take over responsibility for young offender institutes and secure children's homes.
Youth Justice: The experience of Welsh children in the Secure Estate claims the Welsh government's focus on children's rights is "considerably more developed than the agenda delivered by counterparts in Whitehall."
Committee chair Sandy Mewies said: "The committee doesn't believe Wales should become a soft touch for young offenders, but it does realise they are children first and offenders second.
"The evidence we have heard offers a compelling case for devolving the juvenile secure estate as this will give the Welsh Government the power to affect change and tailor its structure more to the needs of Wales."
Other recommendations include launching a campaign to challenge the public perception of young offenders and a review into the use of custody.
Members have also asked to review the criminal age of responsibility in Wales, with a view to raising it.
John Drew, chief executive of the Youth Justice Board, which oversees YOIs and secure children's homes in England and Wales said: "The Youth Justice Board acknowledges the report and welcomes the focus it has put on the need to deliver high quality services to children and young people in custody and on community sentences."
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