The new law allows workers to opt out of paying union fees. Supporters say by allowing people to decide for themselves whether to back a union, it will lead to more jobs.
Thousands took to the streets outside the statehouse to protest the bill's passage.
But Gov. Mitch Daniels immediately signed the bill into law on Wednesday. He said he believes it will help attract jobs.
"Indiana will improve still further its recently earned reputation as one of America's best places to do business, and we will see more jobs and opportunity for our young people and for all those looking for a better life," a statement released by the governor's office said.
Twenty-two other states have similar laws. Indiana is the first, though, in the nation's rust belt.
Many experts believe the win there will be the only "right-to-work" victory for a while. Even so the law is expected to embolden national advocates.
Several supporters have been unsuccessfully pushing measures in other states since Republicans overtook various state houses in 2010.