We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker …firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex ‘’wage
curve’’ linking wages to hours. Since the steady-state real marginal wage is low, wages respond little to hours. As a result, fi…rms overuse the hours margin at the expense of hiring,  which makes hours too volatile. The Ramsey planner uses infl‡ation as a instrument to dampen inefficient hours fl‡uctuations.

Joint work with Maarten Dossche and Céline Poilly

JEL classi…cation: E30, E50, E60

Keywords: employment, hours, wage curve, optimal monetary policy.