The new agreement also covers artisan and commerce organisations, applying the taxes and benefits regarding employment.

The contracting system remains the same as the last agreement in 1993, which foresees two side-by-side types of contract, one at national level and the other for single firms.

The first type is aimed at recovering and maintaining buying power when inflation rises within the limits set by the government, and the second sets wages according to productivity agreements.

The new labor agreement will give a 3% reduction in working costs by the year 2003, as well as lightening the tax burden on companies who reinvest their profits.

Employees on medium-low wages will also see a 27% reduction in income tax, and a lowering in other revenues targeted to ease the negotiation of local agreements.

The new pact opens a permanent dialogue about economic policy with the participating associations.

Any revenue losses are expected to be made up for by the introduction of a new "carbon tax" and new measures to combat tax evasion.

"It's a good sign, and it sends out the message that we are entering into a new season of investment," said Sergio D'Antonio of Italy's second-largest CISL labour Union grouping.

Criticisms were launched by Silvio Berlusconi's opposition Forza Italia party, saying that the new agreement does not face up to the problem of low labor flexibility in the Italian workplace, and that the fiscal incentives were too low.