Public employment affects job search and matching in the private sector. It also affects the composition of the government budget constraint and thus affects other macroeconomic variables. Monetary policy also impacts the unemployment rate. This paper considers the relationship between inflation and unemployment, and the interactions between private and public sector employment within a general equilibrium model. Agents trade with each other, and choose to work in the public sector or private sector. The growth rate of the money supply, the level of public employment, and public sector wages, all set exogenously by the government, play an important role in determining the equilibrium unemployment.