I build a dynamic stochastic general equilibrium model with search and matching frictions in order to determine the optimal public sector wage policy. Public sector wages are crucial\ud to achieve efficient allocation of jobs. High wages induce too many unemployed to queue for public sector jobs, in turn raising unemployment. The optimal wage depends on the frictions\ud in the two sectors. Following technology shocks, public sector wages should be procyclical, and deviations from the optimal policy significantly increase the volatility of unemployment.