Italy approves key parts of Renzi's new labor rules

ROME (Reuters) - Italian Prime Minister Matteo Renzi made important progress with his reform agenda on Friday when his cabinet gave final approval to key parts of his overhaul of labor market rules, which will now take immediate effect.

After a four hour meeting, cabinet approved the legislative decrees which ease firing restrictions for large private sector firms and aim to reduce the use of temporary contracts.

Renzi says the new rules can boost job creation in a country which has one of the lowest labor participation rates in the euro zone and where young people are hired almost exclusively on temporary contracts with few rights or labor protection.

"This day has been awaited for many years and it has been awaited by an entire generation," Renzi told reporters.

He estimated that at least 200,000 people on temporary contracts would switch in the next few months to a new type of permanent contract offering compensation in case of dismissal that gradually increases with seniority.

This new contract, along with the reduction of job protection for workers in large companies and an extension of unemployment benefits for temporary workers, are the main legislative changes approved by the cabinet on Friday.

These had already been given a green light by parliament but required a so-called activating decree to pass into law.

Other aspects of the reform, aimed at streamlining the many types of temporary contracts, overhauling the current system of job centers and training and further revising unemployment benefits, are still before parliament.

Renzi's Jobs Act has been fiercely contested by trade unions and the left wing of his own Democratic Party, who say the easing of firing restrictions undermines basic workers' rights.

On the other hand, some employers' bodies wanted it to go much further by including the public sector and changing the terms of those already in work, rather than just new hires.

Most economists say the new rules go broadly in the right direction, but that Italy will only be able to significantly cut record high unemployment if it can revive an economy which has not grown for more than three years.

Under the reform, companies with more than 15 employees will from now on be able to fire workers for business reasons without the risk of having to reinstate them even if the dismissal is ruled unlawful.

Unjustified dismissal will require payment of compensation but the worker will not be able to get his job back as is the case at present. The change will not affect the public sector or people already in work -- only new hires in the private sector.

The current rules allowing for reinstatement do not affect companies with fewer than 16 employees, which account for close to half of Italy's workers.

(Editing by Robin Pomeroy)