The article explores how imperfections in the labor market impact the economy in a model with staggered price and wage setting. The study shows that labor market imperfections have a bigger effect on output and welfare when there is a positive target inflation rate. Central banks often aim for an inflation rate between 1% to 2% for a reason. A labor market with high monopolistic competition, low wage stickiness, and low wage indexation is preferred in an economy with a positive target inflation rate.