Under the new regulations, workers in companies with more than 200 employees will have the right to know what men and women in equal positions are earning.
Businesses with more than 500 staff members will also have to publish regular updates on salary structures to show they are complying with equal pay rules.
Women's Affairs Minister Manuela Schwesig hailed the law on salary transparency as "a real breakthrough" that would help millions of women narrow the pay gap.
"We have to break the taboo that you don't talk about money, because we want to make sure that men and women aren't played off against each other when it comes to wages," she told the Rheinische Post newspaper.
Women in Germany earn around 21 percent less than men, according to her ministry. This is worse than the European average of 16.5 percent, according to 2015 data.
The discrepancy is in part down to the fact that women in Germany tend more often to work in low-paid jobs or sectors, or only part time.
For women with the same qualifications doing the same work as a male colleague the pay gap stands at seven percent, the women's affairs ministry said.
Critics have argued that the new regulations will foster workplace animosity and create unnecessary red tape.
Christian von Stetten, a lawmaker from Merkel's Christian Democratic Union (CDU) party, said some 4,000 companies would be burdened with additional bureaucracy because of the law.
"The right to demand salary information will foster workplace envy and discontent," he told Die Welt daily.
