Empirical evidence suggests that inflation has a positive effect on both output and unemployment in the long run in the United States.This paper develops a search-theoretic monetary model with heterogeneous agents in which a higher inflation rate increases both output and unemployment.The model has two key features: (i) separation between workers and employers and (ii) endogenous labor force participation. Changes in money supply redistributes consumption between employers and workers. This redistribution along with endogenous labor force participation creates a channel by which a higher inflation rate increases output, unemployment, and labor force participation. Though output rises, inflation acts as a regressive consumption tax. Consumption and welfare of workers fall. The Friedman rule does not maximize social welfare.