The measure went through despite tens of thousands of protesters descending on the state capital, Madison, and 14 Democratic senators leaving the state to try and stop the vote taking place.
Republicans passed the measure through the senate on Wednesday by stripping the bill of the fiscal measures which require a quorum. The state assembly approved it on Thursday.
Legislators in Ohio made a similar move against collective bargaining for public workers last week and several other Republican-led state legislatures are considering laws to restrict union rights in the public and private sector.
Critics say the legislation is part of a larger effort by Republicans aiming to undermine unions - a major source of financial and grassroots support for Democrats - in key swing states ahead of the 2012 presidential election.
The White House called it a "partisan" move which turned a budget debate "into an assault on public sector employees".
President Barack Obama "believes that it is wrong to use those budget problems to denigrate or vilify public sector employees," White House spokesperson Jay Carney told reporters Thursday.
Democrats vowed to fight the law in court and efforts are also trying to recall Governor Scott Walker and a number of Republican lawmakers.
Walker claimed that eliminating collective bargaining rights so public workers cannot fight pay and benefit cuts was the only way to end the state’s budget deficit.
"I signed the budget repair bill to save jobs, balance the budget, help taxpayers, and reform gov't," he said in a Twitter message accompanied by a picture of the private bill signing.
"The budget repair allows us to save 1,500 state jobs. I notified the unions of the good news this AM," he wrote.