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.
Germany has one of the widest pay gaps in Europe, ranking only above seven other countries in an Expert Market report released in October. Women earn 21.6 percent less than men in Germany – which is a wider margin than the European average of 16.5 percent, according to 2015 government 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.
Expert Market found in another report sent to The Local that Germany will not be able to close its pay gap until 2046, coming in 21st place in a ranking of 26 countries.
Last year Germany also implemented a so-called “women's quota” for larger businesses to help get more women into higher positions. But a report this week found that the country's boardrooms are still largely male-dominated, even with the quota system calling for supervisory boards to have 30 percent women.