Lagarde said premier Matteo Renzi’s so-called Jobs Act, which will give companies more flexibility over hiring and firing, is “important for fighting dualism" between workers who have jobs and protection, and those who do not, Ansa reported.
Speaking at the inauguration of Milan’s Bocconi University’s academic year, she also said the changes will make the market work better for workers and businesses, while adding that more needed to be done to boost training and apprenticeships on the model of Austria, Finland and Sweden.
But Lagarde also warned Italy it could be heading for a social explosion if it fails to address chronic levels of youth unemployment and a "toxic" economy.
Lagarde quipped that Italy's 43 percent jobless rate among 15-25-year-olds would "make even the Mona Lisa frown."
But she made it clear that the unemployment crisis, which has sent emigration to a 10-year high, was no laughing matter against a toxic backdrop of low inflation and low growth across much of Europe.
"This is not just a cross for the young to bear," Lagarde said. "Sooner or later this is a cross that society will need to bear.
"Persistent unemployment not only undermines economic activity, it undermines people's self-esteem, and it tears at the fabric of society and institutions by breeding inequality and sometimes violence."
Lagarde said the impact of low growth was three times as severe for young job seekers for older adults.
She cited IMF research indicating that restrictions in Italy's labour market, which Prime Minister Matteo Renzi is seeking to remove, had made the crisis particularly acute in the country.
"Between 1996 and 2001, Italy was able to reduce its total unemployment rate by seven percentage points by growing at an average rate of almost two percent per year.
"The problem is that our current forecasts for growth are far weaker - about one percent annually over the next four years."
She added: "Low growth and low inflation are a toxic mix. They create a vicious circle: if you expect low growth in the future, you will invest less, and hire less, today. Overcoming this vicious cycle is the challenge, not only for Italy, but for Europe as well."
Italy has been described as operating an "apartheid" labour market in which a privileged group of workers enjoy high levels of security and benefits while the rest of society, especially the young, have to endure poor conditions and precarious employment contracts.
She also urged the reformist premier to do more to cut payroll taxes that inhibit job creation towards the European average - a step she said could reduce youth unemployment by as much as eight percent.
Figures released by state statistics body Istat on Tuesday revealed that 82,000 Italians, roughly 0.13 percent of the population, emigrated in 2013.
That was a 10-year high, and anecdotal evidence suggests the figure will be even higher this year.
The vast majority of the leavers are between 20 and 45 with Britain, Germany, Switzerland and France the favourite destinations.
The Jobs Act won the backing of the Senate last week, giving Renzi the green light to push ahead with an overhaul of the country’s sclerotic labour market.
But unions have been strongly opposed, with the country’s biggest – CGIL - planning a general strike and nationwide demonstrations against the plans on December 12th.