How do firms response to falls in demand for their products in the real world? Do they cut wages? Or are they able only to freeze them? What other methods can they use to adjust their labour costs? And does any of this matter? The answer to the final question is emphatically yes. How firms adjust the quantity and cost of their labour input, particularly in response to a downturn, is relevant for monetary policy. If firms are unable to cut wages – what economists call ‘downward nominal wage rigidity’ (DNWR) – then they have to reduce the number of employees, increasing unemployment, further depressing output and weighing on inflation.