Germany will allow some 130,000 resident foreigners to regularise their immigration status and create new incentives for skilled workers to come from abroad amid unprecedented labour shortages that are contributing to spiralling inflation.
The new immigration law, the first of three planned for the coming year, comes as wage demands reach levels not seen in decades and as the giant engineering groups that power Europe's largest economy plead for more immigration.
"We want to create a modern immigration law," said German Interior Minister Nancy Faeser on Wednesday, reports Reuters.
Late last year, the German economy was estimated to be short of some 400,000 workers, and bottlenecks have only grown since.
Earlier, auto components maker Continental urged the government to come up with a process for "managed" immigration of skilled workers, adding that it needed 2,500 new people each year and faced shortages in software and logistics especially.
In another indication of growing cost pressure, unions at Volkswagen demanded an 8 percent pay hike for workers.
Under the new rules, people who have lived in Germany for five years with "tolerated" status - typically people whose asylum applications have been rejected - will be given a year to meet the requirements for full residency by finding a job, showing they speak German and proving their identity.
Young people below age 27 will, under certain circumstances, be able to apply for permanent residence after just two years.
The law will also attempt to make Germany a more attractive destination for migrants by making it easier for foreign workers to bring their families. In particular, German language requirements will be dropped for accompanying family members.
The coalition that took office at the end of last year promised a dramatic overhaul of the country's antiquated immigration policy. Two future packages are planned that will introduce a points-based entry system for foreign workers and make it easier to gain citizenship.