The government said it will introduce legislation to parliament this month, requiring all employers with more than 25 staff to obtain certification to prove they give equal pay for work of equal value.
While other countries, and the U.S. state of Minnesota, have equal-salary certificate policies, Iceland is thought to be the first to make it mandatory for both private and public firms.
The North Atlantic island nation, which has a population of about 330,000, wants to eradicate the gender pay gap by 2022.
Equality and Social Affairs Minister Thorsteinn Viglundsson said "the time is right to do something radical about this issue."
"Equal rights are human rights," he said. "We need to make sure that men and women enjoy equal opportunity in the workplace. It is our responsibility to take every measure to achieve that."
Iceland has been ranked the best country in the world for gender equality by the World Economic Forum, but Icelandic women still earn, on average, 14 to 18 percent less than men.
In October thousands of Icelandic women left work at 2:38 p.m. and demonstrated outside parliament to protest the gender pay gap. Women's rights groups calculate that after that time each day, women are working for free.
The new legislation is expected to be approved by Iceland's parliament because it has support from both government and opposition lawmakers. The government hopes to implement it by 2020.
Viglundsson said some people had argued the law imposes unneeded bureaucracy on firms, and is not necessary because the pay gap is closing.
"It is a burden to put on companies to have to comply with a law like this," he acknowledged. "But we put such burdens on companies all the time when it comes to auditing your annual accounts or turning in your tax report.
"You have to dare to take new steps, to be bold in the fight against injustice."
(AP)