The coalition government, led by the anti-establishment Five Star Movement and nationalist League, saw the senate vote in favour of the so-called "dignity decree", which will limit fixed-term contracts and make laying off
workers more expensive.
Pushed by co-deputy prime minister Luigi Di Maio, the vote passed by 155 in favour, 125 against and one abstention. It follows approval in the lower house chamber of deputies last week.
"The #dignitydecree has been definitively approved by parliament. Citizens 1 - The System 0," boasted Five Star leader Di Maio on Twitter.
Employment is a particularly important issue for 32-year-old Di Maio -- also Italy's labour minister -- whose party practically swept the board in Italy's south in March's general election.
The unemployment rate for Italy as a whole was 10.9 percent in June, according to data from national statistics agency ISTAT, a figure that rises to 32.6 percent for those aged 15 to 24, well above the euro area average (16.8 percent in May).
However, ISTAT data for 2017 showed that unemployment in the south (19.4 percent) was three times that of the prosperous north (6.9 percent).
The new law, which sweeps away labour reforms adopted in 2015 by the previous government led by centre-left Democratic Party (PD) -- huge rivals of Five Star -- cuts the length of time businesses can employ workers on fixed-term contracts from a maximum of three years to two.
The maximum number of renewals allowed within that period has been cut to four from five, while each renewal will trigger a 0.5 percent increase in social security payments made by that company to the state.
Compensation for unfair dismissal has also been increased. The new legislation also dictates that any company receiving state subsidies will be required to pay it all back if it relocates within five years of receiving that aid.
If the company relocates outside the European Union, the company will have to repay between two to four times the amount of the subsidies received.
Approval of the law was met with forceful dissent from PD senators, many of them allies of former Prime Minister Matteo Renzi, the architect of the 2015 reforms and sworn enemy of Five Star and the League.
Renzi's reforms, commonly referred to as the "Jobs Act" introduced a permanent contract that made it easier for employers to lay off workers within the first three years.
The reforms also substantially reduced social security payments during this period.
Renzi, no longer leader of the PD but a senator and still a powerful voice within the party, blasted Di Maio on Twitter, saying that the law would lead to the loss of 80,000 jobs and calling it the "Unemployment Decree".
According to business association Confindustria, the new measures will discourage investment and limit growth, while the changes to rules for fixed-term contracts "risks having a negative impact" on unemployment.
Last month Tito Boeri, the head of Italy's national insurance institute INPS, clashed with the government when the body said 8,000 jobs would be lost each year over the next decade and that 10 percent of those currently on fix-term contracts will not be made permanent employees as a consequence of the new law, pushing those people on to unemployment benefit.
"The law adopted today by the Senate is one that is against the workers, with a series of headline measures there purely for propaganda purposes. We call it 'decree of unemployment'," said the PD senator Valeria Fedeli on Tuesday, saying the new law would make it more difficult to hire young people, especially in the south.
By Catherine Marciano