[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
WOULD AN INCREASE IN THE FEDERAL MINIMUM WAGE HELP OR HINDER SMALL
BUSINESS?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT & GOVERNMENT PROGRAMS
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
WASHINGTON, DC, APRIL 29, 2004
__________
Serial No. 108-61
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
______
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COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina ENI FALEOMAVAEGA, American Samoa
SAM GRAVES, Missouri DONNA CHRISTENSEN, Virgin Islands
EDWARD SCHROCK, Virginia DANNY DAVIS, Illinois
TODD AKIN, Missouri GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana BRAD MILLER, North Carolina
STEVE KING, Iowa [VACANCY]
THADDEUS McCOTTER, Michigan
J. Matthew Szymanski, Chief of Staff
Phil Eskeland, Policy Director
Michael Day, Minority Staff Director
SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT AND GOVERNMENT PROGRAMS
TODD AKIN, Missouri, Chairman TOM UDALL, New Mexico
JIM DeMINT, South Carolina DANNY DAVIS, Illinois
SHELLEY MOORE CAPITO, West Virginia GRACE NAPOLITANO, California
JEB BRADLEY, New Hampshire ED CASE, Hawaii
CHRIS CHOCOLA, Indiana MADELEINE BORDALLO, Guam
STEVE KING, Iowa [VACANCY]
THADDEUS McCOTTER, Michigan
Joe Hartz, Professional Staff
(ii)
C O N T E N T S
----------
Witnesses
Page
Kersey, Mr. Paul, Bradley Visiting Fellow in Labor Policy, The
Heritage Foundation............................................ 3
Garthwaite, Mr. Craig, Director of Research, The Employment
Policies Institute............................................. 5
McCracken, Mr. Todd, President, National Small Business
Association.................................................... 8
Fredrich, Mr. Mike, Manitowoc Custom Molding, LLC................ 9
Bernstein, Dr. Jared, Senior Economist, Economic Policy Institute 11
Appendix
Opening statements:
Akin, Hon. W. Todd........................................... 20
Prepared statements:
Kersey, Mr. Paul, Bradley Visiting Fellow in Labor Policy,
The Heritage Foundation.................................... 23
Garthwaite, Mr. Craig, Director of Research, The Employment
Policies Institute......................................... 28
McCracken, Mr. Todd, President, National Small Business
Association................................................ 36
Fredrich, Mr. Mike, Manitowoc Custom Molding, LLC............ 40
Bernstein, Dr. Jared, Senior Economist, Economic Policy
Institute.................................................. 48
(iii)
WOULD AN INCREASE IN THE FEDERAL MINIMUM WAGE HELP OR HINDER SMALL
BUSINESS?
----------
THURSDAY, APRIL 29, 2004
House of Representatives,
Subcommittee on Workforce, Empowerment, and
Government Programs
Committee on Small Business
Washington, D.C.
The Subcommittee met, pursuant to call, at 10:37 a.m. in
Room 311, Cannon House Office Building, Hon. W. Todd Akin,
[chairman of the Subcommittee] presiding.
Chairman Akin. Good morning. The Subcommittee will come to
order. I will be making an opening statement here, and then we
will be hearing from our different panelists.
I just wanted to thank everybody for coming in this morning
and know that your time is busy, but we are really looking
forward to what you have to share.
The subject of the hearing today is the question on the
proposed changes in the federal minimum wage on small
businesses and their employees. I would especially like to
thank our witnesses who have agreed to testify before this
Committee.
The Fair Labor Standards Act of 1938 established a federal
minimum wage of 25 cents an hour for most workers. From 1939 to
1997, the maximum wage was raised 19 times. The current basic
minimum wage is $5.15 an hour, with a lower wage for tipped
employees, certain new hires under the age of 20 and full-time
students who work part-time.
Various bills dealing with the federal minimum wage have
been introduced during the 108th Congress. Most recently,
during Senate consideration H.R. 4, the welfare reform
reauthorization legislation, an amendment to raise the federal
minimum wage to $7 an hour, an increase of more than 35
percent, was introduced by Senators Boxer and Kennedy.
Debate surrounding any increase in the federal minimum wage
usually includes reference by proponents to the benefits that
would be derived from any increase to some of our nation's
neediest citizens.
All of us here want to help ensure that all Americans are
able to advance in a society where opportunity is abundant and
prosperity is the norm, but, as we work for these goals, a
mandatory wage imposed on the private sector from Washington is
not the solution we need, in my opinion.
Although well motivated, the preponderance of evidence
suggests that rather than helping them raising the minimum wage
actually has an adverse affect on the nation's low income and
lower skilled workforce.
A study conducted by the Employment Policies Institute
suggests that despite the robust economy at the time, the 1996
minimum wage increase of just 50 cents an hour destroyed
approximately 645,000 entry-level jobs. These low skilled
citizens are most likely to take these entry level positions
and, therefore, are the most adversely affected when these
types of jobs are eliminated.
Recent news indicates that our economic recovery is
beginning to move into high gear. The report that non-farm
payroll employment increased by 308,000 in March reflects our
strong economic indicators.
As legislators, it is our responsibility to pursue policies
that will continue to expand this economy and encourage job
creation and do away with policies that kill jobs. Federal
Reserve Chairman Alan Greenspan once said: ``The reason I
object to the minimum wage is I think it destroys jobs, and I
think the evidence on that, in my judgment, is overwhelming.''
I have to say that I do agree with Greenspan. Whether it is
in good times or bad, pursuing increases in the federal minimum
wage costs low skilled and low income Americans their jobs.
I look forward to hearing testimony from each of the
panelists today. Before we get started, I would like to give
Congressman Tom Udall, and he gets an extra star for coming in
when there are no votes. Actually three stars. He is doing very
well today. I give him, the Committee's Ranking Member, an
opportunity for an opening statement as well.
Tom?
[Chairman Akin's statement may be found in the appendix.]
Mr. Udall. Thank you, Mr. Chairman, and thank you for the
three stars. I always like to get those. No doubt about it.
The importance of the minimum wage is increasingly evident
today as an estimated 6.9 million workers rely on it to provide
for them and their families. Unfortunately, the fact is that it
barely does provide for many of these workers.
Currently set at a rate of $5.15 per hour, a full-time,
minimum wage worker earns a little more than $10,000 a year,
almost $5,000 less than the $15,000 poverty level for a family
of three.
Also troubling are the 2002 Bureau of Labor Statistics
figures that showed how many workers actually earned the
minimum wage. According to their figures, 570,000 workers were
paid minimum wage, while over 1.6 million were paid less.
Our nation's economy cannot afford to be underpaying such a
large number of American workers. In addition, many of those
individuals who earn the minimum wage usually do not receive
employment benefits such as health insurance and pensions.
As discussions regarding raising the minimum wage progress,
the rhetoric often heats up about why this cannot or should not
be done. We have heard that an increase in the minimum wage
lowers employment, that it makes it harder for low skilled
workers to find jobs and that low income families will not
really reap any benefits.
The bottom line is that American workers deserve a raise,
and it is long overdue that they receive one. It has repeatedly
been shown that minimum wage increases actually have raised
employment or allowed it to remain constant.
In 1991 and 1996 during the debate on the minimum wage, it
was suggested that raising it would result in an economic
downturn. Once raised, however, the once feared economic
downturn never materialized. In fact, it was during this time
that our country enjoyed two of the longest economic upswings
in our nation's history.
While it is not clear how much the minimum wage increase
contributed to this economic surge, I do know this. What is
clear is that the negative effects predicted from providing
American workers with better wages did not come to pass.
Today we likely also will hear the argument that by
increasing the minimum wage we are hurting our nation's small
businesses, yet there is still no evidence to indicate that
this is true. In fact, some data show that the impact on our
nation's small businesses would not be significant.
One such study conducted by the Jerome Levy Institute in
1997 found that the most recent increase in the minimum wage
did not affect the majority of small businesses. Ninety percent
of the small firms surveyed for their study stated that the
increase did not affect their employment or hiring decisions,
and the reason is that many U.S. small businesses already pay
wages above the minimum wage.
I believe it is time for Congress to step in and authorize
an increase in the minimum wage. At a time when we are giving
millions of dollars in tax breaks to corporate America, we also
need to take into account the hard working families in this
country. They, too, deserve to see an increase in their wages,
and we must take legislative action to make sure that our
nation's hard working families are able to live on today's
minimum wage earnings.
Chairman Akin, thank you for holding this important
hearing. I also would like to thank the witnesses for coming
today, and I look forward to hearing their testimony and yield
back.
Chairman Akin. Thank you.
We are going to now proceed I think pretty much in the
order you are seated. Dr. Paul Kersey, Bradley Visiting Fellow
in Labor Policy from the Heritage Foundation.
Paul, give me one second. Opening will be five minute
statements. Please proceed, Paul.
STATEMENT OF PAUL KERSEY, THE HERITAGE FOUNDATION
Mr. Kersey. Mr. Chairman, Members of the Committee, I am
Paul Kersey; not Dr. Paul Kersey, but Paul Kersey, Bradley
Visiting Fellow at the Heritage Foundation. Thank you for
inviting me to discuss the economic effects of the minimum
wage.
I should say up front that I am speaking for myself today,
and my opinions do not necessarily reflect those of the
Heritage Foundation.
It is understandable to want to help out poor families, and
toward that end it has been suggested that Congress increase
the minimum wage from the current $5.15 an hour to $6.65 an
hour.
Well, I have good news and bad news for you. The bad news
is that increasing the minimum wage will do little to improve
conditions for the working poor because relatively fee of the
recipients of such an increase are living in poverty. The good
news is that the working poor do not necessarily need
government help. Research shows that the dead-end job is
largely a myth.
This is not to say that the working poor do not have a hard
road ahead of them, but for those who persevere it is a road
that leads out of poverty. We should not block off that path by
making low wage jobs more scarce, which is a likely result of
an increase in the minimum wage.
Our analysis of 2003 U.S. Census data shows that of 7.8
million American workers receiving an hourly wage of $6.55 an
hour or less, the immediate beneficiaries of a change in the
minimum wage, only 15 percent are living in poverty, and over
half belong to families earning double the poverty level. One-
fifth of low income workers belong to families earning at least
$80,000 annually.
In other words, the typical beneficiary of a minimum wage
increase will not be a poor father or mother scrambling to keep
a family fed, clothed and housed. The recipients of the pay
raises demanded under this proposal are at least as likely, if
not more so, to already be members of the middle class.
For those low wage earners who are members of poor
families, we should not overstate the effects that an increase
in the minimum wage will have. Our review of the Census data
indicates that fewer than one-quarter of those affected by the
proposed new minimum wage work full-time.
In fact, last year Heritage scholars Robert Rector and Rea
Hederman looked at the average hours of work performed by
adults in poor families and found that a little more than one
quarter, 27.8 percent, reported 2,000 hours or more. Two
thousand hours would be equivalent to one parent working full-
time year-round. Nearly as many families, 27.4 percent,
reported no work at all.
Increasing working hours would have a far greater benefit
for these families, both immediately and in the long-term, than
increasing the minimum wage. Although the minimum wage increase
currently proposed may raise family income by as much as 30
percent in the short-term, Rector and Hederman showed that
increasing work hours to the equivalent of having one adult
working full-time nearly doubles the average income of these
families, even after accounting for lost government benefits
and increased taxes.
Over the longer term, minimum wage or near minimum wage
work can serve as a springboard to better jobs. Unskilled
workers may gain new skills or gain a record of reliability
that allows them to move on to better paying positions.
Low wage earners frequently show their wages rise quickly.
Full-time workers hired at the minimum wage received a median
pay increase of 13 percent in their first year. The schedule of
increases currently under consideration--first to $5.90, then
to $6.65 an hour a year later--is not all that much greater
than the pay raises that occur naturally.
Artificially raising wages will cut off this difficult but
direct path to greater prosperity for many poor families and
will delay the entry of other workers, including youth, into
paid work by needlessly increasing the cost of unskilled labor.
Employers will not be able to afford to hire as many unskilled
workers and will respond by cutting back their services or
replacing workers with machinery.
The average estimate by labor economists is that for a 10
percent increase in the minimum wage, employment among those
affected drops by five percent. If the minimum wage is
increased from $5.15 to $6.65 an hour, demand for unskilled
labor could drop by as much as 15 percent in jobs that earn the
minimum wage, resulting in the loss of hundreds of thousands of
jobs and making it more difficult for poor families to take
this escape route out of poverty.
One final thought about poverty. While it is natural to
have sympathy for our fellow citizens who work at low-wage jobs
and still live in poverty, we should remember that our notion
of poverty is this country is relative. Using U.S. Census data,
Heritage Foundation scholars examined the living standards of
poor Americans and found that the average poor American has a
car, air conditioning in his house, at least one color
television with cable or satellite television reception, a home
that is in decent condition and enough food in the
refrigerator.
Poverty in America, especially for those who do not work,
is less a matter of material deprivation than of emotional and
spiritual loss, the pervading worry that comes from knowing
that one is dependent on the arcane determinations of state and
federal bureaucrats and the loss of self-esteem that comes from
knowing that one is not self-sufficient.
For the working poor, this aspect of poverty is largely
abolished. They are able to face the future with optimism and
confidence, however modest their income, precisely because it
is earned.
Chairman Akin. Paul, we are just about out of time here.
Can you just finish up?
Mr. Kersey. Certainly. There is really no such thing as a
dead-end job. Low-wage jobs provide the poor with an escape
route from poverty. It would be a shame if in the name of
helping the working poor we made this escape route more
difficult for them to follow.
Thank you very much.
[Mr. Kersey's statement may be found in the appendix.]
Chairman Akin. Thank you for your comments.
Our second witness is Craig Garthwaite. Did I get that
right, Craig?
Mr. Garthwaite. Yes.
Chairman Akin. And you are the Director of Research in the
Employment Policies Institute.
Thank you. Would you please proceed?
STATEMENT OF CRAIG GARTHWAITE, THE EMPLOYMENT POLICIES
INSTITUTE
Mr. Garthwaite. Thank you, Mr. Chairman, Members of the
Committee, for the opportunity to testify.
Across Capitol Hill today, Senator Ted Kennedy and other
supports of a minimum wage hike have brought Hollywood
celebrity Ben Affleck to support their cause. While I am a fan
of Mr. Affleck's movies, I am afraid no amount of star power
can overcome the economic destruction wrought by a minimum wage
increase.
As the Chairman noted, Dr. Greenspan's statement best
summarizes the problem with the minimum wage increase. Dr.
Greenspan was referring to the decades of economic research
from economists at universities such as the University of
Chicago, Cornell University and the University of Michigan,
which show that an increase in the minimum wage decreases
employment.
A 1998 survey by economists at Stanford, Princeton and MIT
found that the average economist believes a 10 percent increase
in the minimum wage will lead to a 2.1 percent decrease in
effective employment.
Overall job loss, however, is not the most insidious
employment result from a minimum wage increase. This result is
the fact that the job loss is concentrated on the least skilled
employees, the very individuals supporters of a minimum wage
increase are attempting to help.
These low-skill employees lose their jobs because of
increased competition for more experience and higher skilled
employees attracted to the new wage. Employers, who already
attempt to match productivity to wages to the greatest degree
possible, are more than happy to hire these new employees. The
end result is that low-skilled Americans face extreme
difficulties finding the entry level employment necessary for
future economic success.
In 2004, Duke University economists found that this new
competition following a wage increase comes primarily from
teenagers in wealthy families. Previous research by economists
at Cornell, Boston University and Michigan State University
found that low-skill employees are pushed out of the labor
force in favor of higher skilled teens and others who are
perceived as desirable employees.
This loss of low-skill jobs is not a new phenomenon. It
dates back to the original minimum wage. The Administrator of
the Wage and Hour Division of Franklin Delano Roosevelt's Labor
Department wrote in a report to Congress analyzing the original
25 cent minimum wage that ``in a number of instances there have
been reports that workers who had been receiving less than the
new minimum wage had been laid off and replaced by more
efficient workers.''
Even supporters of increasing the minimum wage admit this
point. The union-backed Economic Policy Institute stated that a
higher mandated wage will ``attract good workers and encourage
them to provide high-quality services.'' In that instance, what
happens to the employees previously in these jobs? Where are
they supposed to learn the skills that we all learned in our
first jobs?
Recently, a small number of studies have been put forth by
economists stating that the minimum wage does not decrease and
may even increase employment. These studies, primarily
conducted by Drs. David Card and Alan Krueger, are a testament
to poor survey methodology.
Respected labor economist Finis Welch of Texas A&M
University summarized the objections of these studies best when
he said: ``The consensus view has big problems with Krueger's
results and methodology. Alan ought to consider the old saw. If
you drop an apple and it rises, question your experiment before
concluding that the laws of gravity have been repealed.''
The experiment in question in this situation involved
poorly trained survey takers utilizing unclear questions that
generated inexplicable changes in the data over the time period
studied.
Overall, the consensus view of the academy has returned to
the fact that increase in the minimum wage does decrease
employment, particularly for minorities and poorly educated
individuals.
In addition to job loss, the minimum wage is a blunt policy
tool unable to discern between a low wage worker who may be
from a wealthy family and a low-income family head. According
to recent U.S. Census data, only 15 percent of the
beneficiaries from a proposed increase in the minimum wage to
$7 an hour would be single earners with children. The remaining
85 percent are teenagers living with their working parents,
adults living alone or individuals who are married with a
working spouse. The average family income for these
beneficiaries is $44,000 a year.
These results really should not be surprising. Even former
Clinton Labor Secretary Robert Reich admitted that ``after all,
most minimum wage workers are not poor.''
The poor targeting of minimum wage results in the majority
of benefits not reaching poor families. Researchers out of
Stanford University found that only 24 percent of the benefits
from the minimum wage hike go to the poorest 20 percent of the
families.
I have spoken quite extensively about what a minimum wage
does. It is important to consider what this anti-poverty
program does not do. It does not decrease poverty. Research
from economists at Ohio University found no connection between
a minimum wage and decreased poverty. For some subgroups, the
office found that minimum wage could increase poverty.
These findings were predicted by Nobel Prize winning
economist Joseph Steigler when he stated that the blunt nature
of the minimum wage makes it ``an inept device for combating
poverty, even for those to succeed in retaining employment.''
When individuals work, they are able to leave poverty
because of their increased skill level and corresponding wages.
As Bill Clinton said: ``The best anti-poverty program is still
a job.''
Recent research at Miami University of Ohio and Florida
State found that nearly two-thirds of minimum wage recipients
receive a raise within one to 12 months of employment. These
raises are non-trivial. Over the past 23 years, the median
annual growth in wages for non-minimum wage employees has been
nearly six times that of employees earning more than the
minimum wage.
The wage growth has even occurred since 1998, a time period
during which minimum wage supporters implied the classist
notion that low-wage employees have been unable to earn the
raises based on their hard work and skill level.
Chairman Akin. Craig, we are going to need to wrap up here.
Mr. Garthwaite. All right. I can wrap up.
Instead of supporting an ineffective anti-poverty tool,
policy makers should support strategies that increase entry-
level opportunities for low-skill Americans. The earned income
tax credit is the most effective anti-poverty program in
existence. The credit provides a tax free cash supplement to
the incomes of working families while simultaneously creating
an explicit incentive for increased work and reducing poverty.
Minimum wage, on the other hand, will not decrease poverty
and will limit the employment opportunities of the least
skilled Americans. By denying these individuals early entry
into the labor force, the minimum wage will push them further
into a life of poverty and government dependence.
Thank you.
[Mr. Garthwaite's statement may be found in the appendix.]
Chairman Akin. Thank you, Craig.
Our next witness is Mr. Todd McCracken. He is president of
the National Small Business Association.
Todd? Thank you.
STATEMENT OF TODD MCCRACKEN, NATIONAL SMALL BUSINESS
ASSOCIATION
Mr. McCracken. Thank you, Mr. Chairman. I appreciate the
opportunity to be here today. I will attempt to summarize my
written statement and make my remarks relatively brief.
Chairman Akin. Todd, did you want to submit for the record
your other comments?
Mr. McCracken. Yes, I would please.
Chairman Akin. Without objection.
Mr. McCracken. The National Small Business Association has
represented small businesses since 1937. We work on a
bipartisan or nonpartisan basis to do what is best for the
small business community.
On this particular issue, we think it is pretty clear that
an increase in minimum wage does not serve the small business
community, and it does not serve the employees of the small
business community either, we do not believe.
To sort of illustrate this point, I would like to use an
example. I use an example of a hardware store in my written
statement, but I would like to sort of talk about that a little
bit and sort of help the Committee understand that increasing
the minimum wage is really an exercise in small businesses
making choices. That is what it is really all about and about
removing one of those choices from the equation.
I mean, if you have a small maybe hardware/lumber store in
middle America someplace that has 15 or 20 employees, many of
whom are part-time, many of whom are relatively young workers
for whom it is their first job in many cases, this is a company
that is already having a very hard time staying afloat.
This is a company that is having to compete with the Wal-
Mart at the edge of town, having to compete with the Home Depot
that just came in. They cannot compete based on price. They
have to compete based upon service. They have to compete based
upon to some extent community goodwill.
If you increase the minimum wage on these folks, some other
people are probably making at or near the minimum wage. Some
are not, but what you see is say minimum wage goes up by $2 an
hour. You see the minimum wage workers seeing their wages go
up.
The people who were making maybe $1 or $2 above minimum
wage? Well, they are going to expect their wages to go up $1 or
$2 an hour as well, so really the whole wage scale goes up a
little bit. Everyone is making a couple bucks more an hour.
That is probably $40,000 or $50,000 a year by the time you add
it all up, plus the FICA taxes that I pay on top of that and
everything else.
I am already not making enough for my business because of
the competition from the big box stores that have come in, so
what choices do I have? I cannot electively have the business
be less profitable. I may as well close my doors if that
happens.
I have to make other choices. What I will do is some of my
employees who are full-time employees probably do have a health
insurance benefit. Well, when that rate increase comes in next
year I am going to pass more of that on to my employees, and
they are going to pay a bigger share of their health insurance
bill.
I am going to look and see if some people are working 30
hours a week can I get by with them working 25 hours or a week
or 20 hours a week. The new kid that I just hired to help out a
friend in church who needed some extra money and they are not
doing so well and I hired him to sweep floors after school, I
cannot afford to do that anymore.
What it does is generate a whole series of other choices
and decisions that a small business owner or operator has to
make inevitably to continue to run a profitable business, to
continue to keep other employees employed and happy.
None of these choices are really ones that I think serve
the interests really of most employees. It does not serve
really to increase the overall welfare of most of those
employees because they wind up making less some other way.
It is our strongly held belief that if we really want to
help the working poor there are plenty of tools at our disposal
to do that. The federal government has at its disposal rather
this very strange, blunt object of a federal mandate in the
minimum wage, and we ought to pursue those if we think that
folks who are working at low wages need to make more money and
not rely on handicapping the small business community in its
day-to-day business decision as a way to do that, A, because it
does not make sense, and, B, because it does not do that.
That is basically my statement. Thank you.
[Mr. McCracken's statement may be found in the appendix.]
Chairman Akin. Todd, thank you very much. I appreciate your
testimony. You brought it in time, so you get one of the stars
here today. You are doing pretty good.
Our next witness is Mike Fredrich. Mike, did you come all
the way from Wisconsin today?
Mr. Fredrich. Yes, I did.
Chairman Akin. We really appreciate that, Mike. From
Manitowoc Custom Molding, LLC. Mike?
STATEMENT OF MIKE FREDRICH, MANITOWOC CUSTOM MOLDING, LLC
Mr. Fredrich. Thank you, Mr. Chairman, and thank you for
inviting me here today. As mentioned, I am the president and
owner of what I think would be considered a small business. We
have 90 employees. They are non-union employees, and our hourly
wages range between $8 and $23.
So why are we here? We do not have anybody that is being
paid minimum wage now, so why should we care? Well, we do care.
It amazes me when I look at what goes on in Washington out
there from the hinterland in the frosty north that there is a
total disregard for action and reaction.
In the economy--I call it the physics of business--there is
an action and reaction, and the previous speaker, Todd,
identified that. We do not have any minimum wage employees, but
we start off people at $8 an hour. We are able to fill
positions. Not easily, but we do fill them.
If there is an increase in the minimum wage as proposed,
and, by the way, we are fighting this in Wisconsin because
Wisconsin is trying to do this on their own, so this is not the
first time I have testified on this subject. If there is an
increase in minimum wage, all the people that we have there at
$8 an hour now expect that their wage should go up. Maybe it
should. I mean, everybody wants to make more money, and there
is a balancing act between running a business that is going to
stay in business and make profits and satisfying people's
needs.
What happens in Washington is you ignore the other part of
what you do. You ignore the reaction. I will just give you an
example of our reaction because this is exactly what we will
do. If we have a forced increase in our wages, the mandated
increase, we have two options which we can look at.
One of which was identified by the previous speaker is our
health are. We now have an 80/20 co-pay for our health care for
our employees. Everybody is eligible. Our premium for single
people is $300, and the premium for families is $800. We pay 80
percent of that every month.
If our wage scale is forced to increase, the first reaction
we would have is we are going to change that ratio. We are
going to change it to 75, to 70/30, but definitely that
scenario we are going to change.
We have tried not to do that over the past two years even
though our expenses have increased because it is an important
thing for people, and we feel it is our responsibility to try
and help people with health care, but it will give us no
option. That is one thing we are going to do.
The second thing we are going to do, and we have already
done it in some cases, is we are going to outsource production.
We have established relationships with companies in China, and
in many cases our products are so price sensitive, especially
when they go into the retail business and they end up on the
shelves of Wal-Mart. It is so price sensitive that a penny
increase in our product will force them to outsource, or maybe
they will go and have the whole product made in China.
In our case, what we would do is we would outsource the
molding for them. We would go to China and say you mold this
product for us. We will import it, and we will turn around and
sell it. I mean, that is what is happening, and that is what is
going to happen in our case.
A third quick example of how the minimum wage will affect
the decision that we make. We are going to hire starting on
Monday a young man who is a junior in high school. He has great
mechanical aptitude. His father works at our company. He is the
head of our maintenance.
We are going to bring him in and give him a job, a summer
job. He is coming in at the minimum wage, $5.15. He is going to
work in the maintenance department. He is going to do all sorts
of stuff. It is like cleaning out your closet at home. You just
never get around to it. We have all sorts of jobs like that. In
the meantime, he can develop some expertise and learn some
things.
He is not worth right now $5.15 an hour. I do not know what
he is worth, but he is probably not worth anything. We are
going to have to train him. By the end of the summer, he will
be worth something. He will have learned something. He will
have developed some skills. It will be a good thing for him.
Increases like Wisconsin is going to do--they go to $6.80
an hour, which is what they are proposing. He gets no job. He
cuts lawns. He does something else, but he does not work at our
company.
I have very little time. I will sum this up in saying I
look at minimum wage as the $100 or nothing argument. I think
it should be $100 or I think it should be nothing. I do not
know how many people in this room make $100 an hour, but would
it not be great if we all did?
What would happen if we did? We would not have jobs
probably, many of us. Maybe you in government would because you
could create the money, but in the private sector there would
be no jobs.
Anybody who advocates an increase in the minimum wage, why
in the heck would they stop at $7? Go to $15. Go to $20. Go to
$25 if you really think that is going to help people Then you
can ignore the results and just see what happens because it
does happen even for a small increase as you are proposing
here, which on a percentage basis is not that small.
There is a reaction, and you must understand that you
cannot operate in a vacuum.
Chairman Akin. Mike, we are about out of time.
Mr. Fredrich. Okay.
[Mr. Fredrich's statement may be found in the appendix.]
Chairman Akin. You will have a chance to come back around
and make some comments as we do the questions.
Mr. Fredrich. All right.
Chairman Akin. Thank you for your testimony.
Mr. Fredrich. Thank you.
Chairman Akin. Our last witness is Jared Bernstein, senior
economist with the Economic Policy Institute.
Jared? You are a doctor. Is that correct?
Mr. Bernstein. That is right.
Chairman Akin. Good. Thank you. Could you please proceed?
STATEMENT OF JARED BERNSTEIN, ECONOMICS POLICY INSTITUTE
Mr. Bernstein. I sincerely thank the Chair and the
Committee for the opportunity to testify on this issue of great
importance to working families, and I submit my written
comments for the record.
Chairman Akin. Without objection.
Mr. Bernstein. Congress has long recognized the need for a
policy that prevents market forces from driving the wage of our
lowest paid workers down below a level deemed to be minimal by
both our elected officials and our general sense of fairness
and decency.
Since it is not indexed to inflation, the buying power of
the minimum wage declines unless our nation's leaders enact an
increase. Thankfully, there are a couple of proposals being
discussed right now to raise the minimum, and I speak to these
specific proposals below.
It is not widely recognized that we as a nation are on
track to tie the longest period over which Congress has failed
to enact an increase in the minimum wage. The minimum wage was
ignored for nine years over the 1980s until George H. Bush
signed an increase in 1990. The next increase came under
President Clinton in 1996 with bipartisan support from a
Republican majority Congress.
Thus, while increasing the minimum wage is often a divisive
issue, it is instructive to note that partisans have
historically worked together to ensure that the lowest paid
among us are not wholly subject to the vicissitudes of the
marketplace. The current period is the second longest on record
without an increase.
I am now going to refer to a set of charts that I prepared
and are submitted for the record. The real minimum currently
stands, the minimum adjusted for inflation, at 30 percent below
its peak level in 1968 and 14 percent below its level in 1997
when it was last increased.
The importance of that last point is as follows. The
inflation that has occurred since the last increase passed in
1996 has now fully eroded its value. That is, in 2004 dollars
the minimum wage in 1995 was $5.19 compared to $5.15 today, so
the last increase is essentially gone.
The last minimum wage increase in 1996-1997 increased the
earnings of about 10 million workers, about nine percent of the
workforce. The two current increases under discussion, one to
$7 an hour, one to $6.25, would reach far fewer workers, about
seven million for the higher one and four million for the lower
one, so in this case these are modest proposals.
Now, we have heard a lot about the negative employment
outcomes discussed on the panel so far, and this is despite the
fact that contemporary economic research casts a long shadow of
doubt on this contention. The so-called disemployment argument
is particularly difficult to maintain given some recent
developments in the history of minimum wages.
First of all, recent studies solidly reject the
conventional hypotheses that we have heard discussed thus far,
but, secondly, and I think much more importantly as
Representative Udall mentioned, following the most recent
increase legislated in 1996, the low-wage labor market
performed better than it had in decades.
The fact that employment and earnings opportunities of low-
wage workers grew so quickly following that increase continues
to pose a daunting challenge for those who maintain that the
minimum wage hurts its intended beneficiaries.
On the point of small business, there is a recent study
which I present in my testimony which shows the outcomes
between states with higher minimum wages at the federal level
and those who have kept their minimum wage at the federal level
for small businesses.
Between 1998 and 2001, the number of small business
establishments grew twice as quickly in states with higher
minimum wages. Employment grew one and a half percent more
quickly, so small businesses, according to these data, have
actually performed better in states with higher minimum wages.
We have also heard a criticism of the target efficiency of
the minimum wage, the fact that some minimum wage earners
reside in high income families. In fact, most of the gains of
minimum wage increases flow to those in the bottom third of the
income scale. Many of those folks are above the poverty line,
but they still need the increase because their incomes are too
low for them to make ends meet given the current minimum wage.
We have also heard the EITC, the earned income tax credit,
discussed as an important source of income for low-wage workers
and a substitute for a minimum wage increase. I show in my
testimony that the interaction of the minimum wage and the
earned income tax credit is critical for full-time working
parents with children.
In fact, after the last minimum wage increase the earned
income tax income and the higher minimum wage combined to put a
mom with a couple of kids working full-time above the poverty
line. That has now eroded to the point that the minimum wage
plus the EITC no longer achieves that goal.
If Congress acts to increase the minimum wage in tandem
with the earned income tax credit, such families will again be
above the poverty line.
Thank you very much.
[Mr. Bernstein's statement may be found in the appendix.]
Chairman Akin. You did a good job at right exactly there at
five minutes.
We are now at a place where we can take a question or two.
I would defer to the Minority Member, Mr. Udall. Congressman
Udall, if you would like to ask a question?
Mr. Udall. Thank you, Mr. Chairman.
I guess the first question is directed to Mr. Bernstein.
Others on the panel seem convinced that increases in the
minimum wage lead to job losses, but you raised the latter
1990s as a period wherein the minimum wage was raised and the
low-wage market took off.
In fact, low-income working families saw their incomes rise
faster than any time in the past 30 years, and unemployment
fell to a 30-year low. Can you help us square these apparently
contradictory accounts?
Mr. Bernstein. As I said in my spoken statement, this
period poses a daunting challenge for what I would say is the
argument most consistently offered by those who oppose minimum
wage increases.
In fact, the research on this is solid enough that the
consensus among economists has been shifting, particularly due
to the work of David Card and Alan Krueger, including pseudo
experimental empirical research, which is so rare in economics
and provides some of the most convincing research to challenge
the notion that moderate increases in the minimum wage reduce
employment.
There is no better example than the second half of the
1990s when the minimum wage was increased from $4.25 to $5.15.
We heard the exact same arguments that you have heard down this
line at this panel, and here we are again hearing the same
arguments despite the fact that the employment rates of low-
wage workers went up as quickly as they had at any prior point
in their history, along with, as you mentioned, their wages and
income.
Now, this was not attributed exclusively to a minimum wage
hike, and members of the panel and Committee should be aware of
that. I am not claiming that you raise the minimum wage and the
low-wage labor market begins to boom. What I am claiming is
that that evidence is completely inconsistent with the notion
that an increase in the minimum wage leads to job losses in the
low-wage labor market.
The macro economy, the strength of the macro economy,
determines the employment and earnings opportunities of low-
wage workers. The minimum wage determines what they get paid.
Mr. Udall. Thank you.
Mr. Chairman, I do not know whether he put his statement in
the record, but I would like to because----
Chairman Akin. Without objection. Yes.
Mr. Udall [continuing] Yes. There are some very good charts
here. One of them has the inflation adjusted value of the
minimum wage from 1947 to 2004.
Now, I am wondering in looking at this in terms of
inflation and the minimum wage should the minimum wage try to
keep up with inflation? We know that there is less purchasing
power for the minimum wage today. If it should try to keep up,
why is that, Mr. Bernstein?
Mr. Bernstein. I think there are lots of good reasons for
the minimum wage to keep up with inflation. The obvious one is
that the chart that you see on the inflation adjusted value of
the minimum wage would no longer bip and bop around as Congress
and folks like those on this panel had this argument year in
and year out.
The way the thing is structured we have to come back and
have this battle, and low-wage workers are left behind because
their buying power erodes every year. Numerous proposals have
been set forth to index the minimum wage, and I think it makes
sense in order to both establish a buying power that is not
eroded by price decreases and essentially prevents the
politization of the issue every few years.
Mr. Udall. We have seen in terms of wealth distribution a
trend shifting towards the wealthy recently. Can you compare
the effects of wealth distribution in this country, of tax cuts
for higher income people versus an increase in the minimum
wage?
Mr. Bernstein. Sure. I have a figure in my testimony. I
believe it is Figure 6. This figure shows the distribution of
benefits from a minimum wage increase and compares it to the
distribution of income.
If you look at families in the bottom decile, the bottom 10
percent of the income distribution, their average income is
about $11,000 per year. These are working families. Their
average share of the benefits from a minimum wage increase are
30 percent. That is, 30 percent of the gains from the minimum
wage go to these low income families whose average income is
$11,000.
If you go up to the top end, you will find that in the top
10 percent those families' average income is $181,000 per year
compared to $11,000 in the bottom decile. Their share of the
gains from the minimum wage increase is about three percent, so
some of the gains do leak up to the top, but a very small
amount. Meanwhile, you see how skewed the income distribution
is.
One of the problems we faced in our current recovery right
now, and no less than Greenspan commented on this the other
day, is that the growth that has occurred thus far has been
concentrated almost exclusively among profits. Compensation has
been flat, particularly for those at the low end, and for those
earning the minimum wage their earnings fall with inflation
year in and year out.
One of the reasons that I stress in my testimony to
increase the minimum wage is to essentially give a bit of
bargaining power to those at the bottom end who lack that and
ensure that some of the benefits of a relatively strong growing
economy accrue to those who are helping to promote that growth.
Mr. Udall. Thank you.
Chairman Akin. I appreciate the exchange here. I guess
maybe I will kind of pick up where you left off.
Mike, I appreciate your comment about when you see an apple
fly up in the air you have to start wondering about the laws of
gravity. It seems like that it a little bit what we are talking
about.
There were a couple of questions that you raised that I
think make sense, and that is if a minimum wage of $7 or $8 is
good, why is $100 not better? Obviously this is one of those
things that apparently if you push it too far something bad is
going to happen.
I guess the question for anybody who would like to answer
it is let us just say that you do push the minimum wage and say
you kick it up to $20 or something. What would be the effect of
doing something like that? Anybody want to take a shot at that?
Mr. Fredrich. I have my light on here, so I will take a
swing at it.
It does not have to go to $20. I mean, if it went up 15
percent or 10 percent, any incremental increase will have an
inflationary effect on the cost of labor in this country.
Chairman Akin. First of all, if you raise the minimum wage
the cost of labor is going to go up. That seems pretty
straightforward.
Mr. Fredrich. Absolutely. Companies buy labor like you buy
grapes or I buy grapes. I was in the supermarket yesterday, and
grapes are $2.50 a pound. I am not buying grapes at $2.50 a
pound. When they get to 99 cents, I am in the market.
Labor is the same way. Labor gets too expensive. Companies
seek alternatives. They will do something else. They will take
an action. They have more potential actions to take than the
employee does. Their action is to outsource. Their action is to
eliminate people. Their action is to reduce their health care,
which is what we are going to do.
If you increase a rate to something like $15 or $20, and
people talk about living wages, you have increased the cost of
doing business in the United States.
Chairman Akin. Mike, I would just sort of like to break in
there.
We have been holding hearings around the country, and one
of the things over the period of the last several years, we
have been talking to people who have been moving their
companies overseas at great cost to communities because the
jobs are gone.
The reason that somebody moves their business overseas is
strictly money, and the reason they do it is because it is
cheaper to make product overseas. One of the things that we
have tried to focus on are what are the things that are costly
which make us uncompetitive as a nation which make those jobs
and businesses go overseas.
If you increase one of the costs of doing business, which
is labor, you are creating an incentive to send more jobs and
to do the work somewhere where the labor is cheaper. Is that
not correct?
Mr. Fredrich. That is absolutely right. You can look at
study after study. You cannot do studies and control all the
variables. I mean, it is in a vacuum.
The speaker to my left here quoted a study, but it does not
pass the logic test. Just think about it in your own lives. If
you increase the price of something, you buy more or less of
it. If you create a price for a product or a service that is
above the market place, what have you done to the market? You
have changed the market.
Now, companies are going overseas and producing overseas
because they cannot be competitive here. They still want to
stay in business, and I think we still want to have a
capitalistic system in the United States.
We are creating overhead burden on our companies by actions
just like we are talking about here today. There are many
others.
Chairman Akin. In other words, following the logic that we
are talking about, the answer to my original question, which
was your question, why not shift the minimum wage to $100, the
effect is as you raise it up you are going to get fewer jobs,
but the people who do have jobs are going to be very happy
because they are making a lot of money, so it is a tradeoff
between the number of jobs and how much money people will make.
That is the bottom line, is it not?
Mr. Fredrich. It is employment versus compensation. If you
want to expand employment, my gosh, all the talk in Washington
is all the jobs that we have lost.
Our company has added 30 jobs in the last year due in part
to the fine work that the Congress has done in lowering our tax
burden.
Chairman Akin. My understanding is that the unemployment
rate now is about 5.7, which is about a 50 year average, so
while the unemployment is improving significantly month to
month--we just had one of the best months ever in March with
308,000 new jobs--still we are looking for that to get even
better in the months ahead.
What you are going to do is it is going to cost you on the
employment side. You raise minimum wage, you are going to have
fewer jobs. It is a tradeoff.
Mr. Fredrich. Absolutely. It is supply and demand. It is
not something we either like or do not like. It is just sort of
like the law of gravity. It is what it is.
Chairman Akin. Did you want to comment on that as well?
Mr. Garthwaite. As we talk about the employment rate, I
think it is important that we do not just concentrate on the
national employment level, which was 5.7 percent, but we start
to look at some of the groups that are really going to be
affected by minimum wage increases.
You have teenage unemployment in the country right now at
16.5 percent. You have minority teen employment for African-
American youth age 16 to 19 that is at 29.4 percent.
There are a lot of things we can do to increase the
opportunities for these people to get into the market. Clearly
one thing we can do to make sure they do not get a job and that
would increase those unemployment rates is to raise the minimum
wage.
Chairman Akin. Thank you very much. We are done with the
comments I had.
Mr. Udall. Thank you, Mr. Chairman.
Mr. Bernstein, on Figure No. 4 in your presentation here
you compare proposed minimum wage increases to the 1996-1997
increase. What this chart apparently shows is that the proposed
increases compared to these previous increases impact fewer
workers.
Could you explain this chart a little bit and what this is
really saying and what the relevance to this hearing is?
Mr. Bernstein. Sure. It actually relates to the question
that was posed by the Chair.
The minimum wage increase in 1996-1997 reached about nine
percent of the workforce. That is, about 10 million workers
earned between $4.25 and $5.15 when that increase went into
effect, so that is the number of folks who essentially were in
the sweep. They were the ones who got a wage increase due to
the increase in the minimum.
Right now, because wages have grown over the past seven
years--as we discussed earlier, we had a very strong wage
growth at the low end--you would need a larger increase if you
were going to get that same number of workers in that sweep.
The proposals that are under discussion, they will reach
about seven million workers--that is about six percent of the
workforce--if you go to $7 and about four million if you go to
$6.25, so they will have considerably less reach in that
regard.
I think this is important regarding the Chair's question.
Nobody is advocating a minimum wage of $20 or $100 per hour of
course, but it does raise the question of how high can you go
and how high should you go. I think that is a good question.
The economic research is very consistent on this because,
as you mentioned in your introduction, we have had 19 minimum
wage increases so we have a sense of what kind of impact they
have.
If you capture less than 10 percent of the workers in the
sweep, and, by the way, historically we have never gone above
that rate. If you capture 10 percent or less of the workers in
the sweep when you increase the minimum wage, the job loss
effects that have been so highly touted by other members of the
panel turn out to be immeasurable. You just cannot find them in
the data.
The low-wage labor market, despite what we have heard
today, clearly absorbs such an increase without disemployment
effects, so that is a good guideline when Congress is
considering how high to raise the minimum.
You would not want to go above a level that is going to
capture more than 10 percent of workers in the sweep, and the
two increases that are under discussion pass that test quite
easily.
Mr. Udall. Thank you. Now, the issue seems to be raised
that raising the minimum wage would push us to outsourcing
overseas. Do you agree with that proposition, and do other
countries not have a minimum wage, and how does that relate
with minimum wages around the world?
Mr. Bernstein. Well, some countries do and some do not.
Certainly I am not aware of a minimum wage in China, although
minimum wages in Europe are consistent with ours, if not
higher.
I think the important thing to think about there is that I
think it is an extremely dangerous road to go down if we are
thinking we need to make sure we keep the minimum wage low
enough so that we can compete with China and Mexico. That to me
is a race to the bottom like you have never seen before.
One of the critical aspects of the Fair Labor Standards Act
introduced in the beginning of this hearing is that it sets a
wage floor below which Congress deems we should not pay our
lowest wage workers.
In this sense, it is an expression of a social policy as
much as an economic policy and one that says we as a country
agree that the benefits of productivity growth, which have been
prodigious in this recovery, should be at least partially
shared with all the bakers of the growing pie, not just those
at the top.
The notion that we have to damp down the minimum wage so we
can be competitive with workers in China strikes me as an
extremely dangerous path to hoe.
It is also notable, by the way, that the jobs that are
currently being outsourced pay far more than the minimum wage
if we are talking about IT and high tech jobs. The same thing
for manufacturing. Those jobs in this country pay well over $20
an hour, so that is not really germane.
Mr. Udall. Thank you very much, and let me thank the entire
panel for their testimony today.
Thank you, Mr. Chairman.
Chairman Akin. Thank you.
Just a couple miscellaneous thoughts here. First of all on
the whole question of minimum wage. Does anybody know whether
this has ever been viewed from a constitutionality point of
view?
I mean, just from the logic that if you, Mike, are a
businessman and somebody is working for you, usually the way
that freedom works is that you allow the employee and the
employer to come to some agreement, and you make a deal. I will
work for you if you pay me his much an hour. That is kind of
the way freedom works.
What we are doing here though is we are saying but, Mr.
Employer, you cannot do that. Freedom is not going to work that
way. We are going to tell you how much you have to pay, which,
of course, then makes it completely uneconomic to hire somebody
who is worth less than whatever the minimum wage is. Therefore,
you lose the benefit of some employee that otherwise is
unemployable. If you cannot hire him for a low wage, you are
just not going to hire him at all.
Does anybody question the constitutionality of the
government weighing in and telling in the free market people
what you have to pay for labor? Has that ever been viewed?
Mr. Kersey. I believe that question was taken up during the
Great Depression. I forgot the name of the precise case, but
that question did come up in a number of cases during the Great
Depression, and it was decided that yes, government could
regulate in this area.
It is also worth noting that------.
Chairman Akin. I wonder what part of the Constitution they
cited?
Mr. Kersey. It probably would have been the commerce
clause. Generally there has been an expansion of the federal
government's ability to regulate interstate commerce to the
point where it is no longer even necessary that the actual
commerce be across state lines.
For better of or worse, it appears that we are in a
position where the federal government does have the power to
regulate these areas.
Chairman Akin. Okay. I think that one other thing I might
comment on if I was taken out of context. What we have seen is
that across the board businesses have expenses in this country.
One of the expenses is labor. Another one is health care.
Another one is red tape. Another one is taxes. All of those
things together make up a cost of doing business in America.
The reason that jobs are going overseas is because we are
not competitive quite simply, so from the objective of taking a
look at labor costs we are not trying to compete with China on
an hour-to-hour, what-does-it-cost-for-labor. That is not the
point.
The point is we are trying to compete when you add all of
our costs with all of their costs, so when you effectively talk
about increasing minimum wage what you are doing is you are
increasing our cost. Somebody who does not want to see our cost
increase does not necessarily mean that you are trying to
compete with China for the lowest wage.
Another question I suppose would be it seems that if you
have an automatic increase in minimum wage it is the equivalent
of an automatic tax on businesses in a sense.
I guess the other question I have is the overall not-so-
easy to measure effect that when you drive the lower cost up,
does that not drive every other wage up? I think some of you
mentioned that.
I guess our time here has pretty much expired. I appreciate
you all coming in today. We will stick around for a minute or
two if people have questions or answers or whatever, but thank
you for the productive hearing.
The Committee is closed.
[Whereupon, at 11:35 a.m. the Subcommittee was adjourned.]
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