There has been a recent debate among economists about whether the minimum wage and the Earned Income Tax Credit (EITC) are “complements” or “substitutes.” That question might seem arcane, but the answer is important in figuring how to help poor families while also boosting the economy.
What are complements and substitutes? Complements are goods that tend to be purchased together – when the purchase of more of one type of good leads to an increase in the purchase of some other type of good. For example, French fries and ketchup, tennis rackets and tennis balls, cars and tires, golf balls and golf tees, and so on.
Substitutes are, as the name implies, goods that can to some extent be used interchangeably. Pepsi and Coke, potatoes and rice, different brands of butter, and jam and jelly are generally viewed as interchangeable. If, for example, the price of Coke increased substantially, then even diehard Coke drinkers would be tempted to switch to Pepsi.