Under the plans, young men will be required to register for potential military service, though it will remain essentially voluntary.
Germany suspended compulsory military service in 2011, but the conflict in Ukraine has reignited the debate around whether young men and women should be required to serve in the army, known as the Bundeswehr.
Defence Minister Boris Pistorius said the new model was "our response to the changing threat situation in Europe".
"With this law, we are setting the course for increasing our deterrence and defence capabilities," he said.
Under the plans, 18-year-olds will be sent a questionnaire asking them about their interest in the army as well as their health and physical abilities.
All young men will be required to return the questionnaire, while for women it will be voluntary.
Based on their answers, a contingent of young men and women will then be invited to a selection process.
The strongest candidates will be recruited for an initial six-month stint of military service, with the option of extending that for those who are interested.
The new model initially aims to gain more than 5,000 extra recruits a year, with a view to increasing that number in the future.
The law must still be passed by the German parliament but if all goes smoothly, it would be likely to come into force early next year.
Since Russia's invasion of Ukraine in February 2022, the German army has struggled to attract recruits as officials seek to boost troop numbers.
Despite a concerted recruitment drive, the Bundeswehr welcomed just 18,802 new members in 2023 -- only 27 more than in 2022.
Opposition parties have called on the government to go further and reintroduce compulsory conscription.
The conservative CDU-CSU alliance has pledged to introduce a year of compulsory community service for young people, which could be completed in the army or by working in civil society.
Since this may take some time to implement, the alliance has also put forward a period of compulsory service for a limited number of people as a stop-gap.
Critics have also said the new law should apply equally to men and women.
However, making military service compulsory for women would require a change to Germany's constitution, something that Pistorius has said would take too long.
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