Chancellor Angela Merkel's cabinet approved a new immigration law which still has to be formally approved by parliament next year, possibly with some amendments.
Economy Minister Peter Altmaier hailed as a "historic day" the cabinet's decision on Germany's first immigration law, which had been eagerly anticipated by business groups.
SEE ALSO: How Germany plans to fight worker shortage with new immigration law
The new law aims to attract foreign skilled vocational workers with German language skills, including those from outside the European Union, and promises them eased visa procedures and reduced red tape.
"We need manpower from third countries to safeguard our prosperity and be able to fill the job vacancies," said Interior Minister Horst Seehofer.
Job-seekers such as cooks, metallurgy workers or IT technicians would be allowed to come to the EU's biggest economy for six months to try and find employment, provided they can financially support themselves.
A separate provision, which sparked much controversy, will allow permanent residency for some of the rejected asylum seekers in Germany who have been granted stays of deportation because their home country is considered unsafe.
To qualify, they must have held a full-time job for 18 months, speak at least intermediate-level German, be socially well-integrated with no criminal offences, and be able to prove their identity.
"We must not deport the wrong people," said Labour Minister Hubertus Heil, who stressed that many of the recent arrivals now "speak German, work, are industrious and are useful for Germany".
Nonetheless, the provision for asylum seekers had been criticized for potentially sending the wrong signal and encouraging human traffickers to bring illegal migrants to Germany on the promise they will eventually be allowed to stay.
Immigration has been a hot-button political issue since Germany has absorbed more than one million mostly Muslim refugees and migrants from 2015.
The large influx sparked a xenophobic backlash that saw the far-right, anti-immigration and anti-Islam Alternative for Germany (AfD) enter parliament a year ago as the biggest opposition party.
Germany is struggling to fill positions across the board, including in the metal industry. Photo: DPA
But Germany has also been anxious not to leave thousands of migrants idle and susceptible to taking on jobs on the black labour market while they spend years awaiting a final decision on their asylum claims.
The ministers stressed that the new rules aim to find a "pragmatic solution" for rejected asylum seekers who cannot be sent back because, for instance, they face the risk of torture in their country of origin.
Sounding an optimistic note, the head of the Confederation of German Employers' Associations, Ingo Kramer, last week said that, of those who arrived since 2015, "more than 400,000 are in employment or training... even I
am surprised at how quickly it's progressing".
With unemployment at 5.0 percent, a record low since Germany's 1990 reunification, companies in Europe's most populous economy have long complained that a chronic shortage of workers is threatening growth.
In the areas of mathematics, computing, natural sciences and technology, a record 338,200 jobs went unfilled in September, according to data from the Cologne-based German Economic Institute.
Altmaier said the new rules will especially help Germany's small-and-medium-sized companies "which in the past have suffered as they are in competition with big companies that have poached the well-trained people".
To attract qualified professionals from abroad, the German government has opened the information website make-it-in-germany.com.
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