Dan McElroy, Executive for Minnesota hospitality industry trade
Provide good early education and
a sense of opportunity
to improve workforce preparation and region's competitiveness
A Civic Caucus
Focus on Competitiveness
Interview March 28, 2014
John Adams, Dave Broden
(vice chair), Janis Clay, Paul Gilje (coordinator), Sallie Kemper, Dan
Loritz (chair), Dan McElroy, Paul Ostrow, Dana Schroeder, Fred
According to Dan McElroy,
president and CEO of Hospitality Minnesota and executive vice
president of the Minnesota Restaurant, Lodging and Resort & Campground
Associations, emphasizing early childhood education and creating a
sense of opportunity that it's worth staying in school and going to
college are the best ways to develop a highly qualified workforce. He
also urges that we concentrate on helping immigrant, low-income
families, who may have no college experience, to build up the cultural
and financial capital and educational momentum to be successful.
Minnesota's leisure and hospitality industry
has a large impact on the state's economy, McElroy says, accounting
for 11 percent of the state's total private-sector employment and
generating $4.3 billion in wages. In 2012, the industry generated
$12.5 billion in gross sales and employed 245,411 people in
McElroy says the associations he represents
are concerned about the recently enacted state minimum wage of $9.50
an hour. They believe $8.50 would have been more reasonable. He points
out that some low-skilled hospitality workers earn more than the
minimum wage already. He's concerned about the impact of the new wage
on the jobs of people who get tips, since Minnesota is one of only
seven states that don't count tips toward the minimum wage. He says
the minimum wage system used in the United Kingdom has taken the
politics out of the issue.
Besides competing to keep companies in the
state, help companies grow and attract new companies, Minnesota also
competes for people and cultural assets, McElroy points out. He
believes the larger region, not just the artificial borders of
individual states, is the proper context to think about
competitiveness. Minnesota benefits when the rest of the region is
Issues to address
Prior to the meeting, Dan
McElroy was asked to be prepared to discuss the following issues: the
contribution of the hospitality industry to Minnesota's economy; how
the hospitality industry feels about raising the minimum wage; where
Minnesota is lacking and what it would take to make Minnesota more
competitive; whether the concepts of foundational competitiveness and
investment attractiveness make a reasonable model for looking at the
state's economic competitiveness; and how the future evolution of the
economy will impact the hospitality industry.
Dan McElroy is president and
CEO of Hospitality Minnesota and executive vice president of the
Minnesota Restaurant, Lodging and Resort & Campground Associations. He
came to the associations in 2011 from Minnesota state government,
where he served as commissioner of the Department of Employment and
Economic Development (DEED), Gov. Tim Pawlenty's chief of staff and
commissioner of the Department of Finance.
McElroy has years of experience as an
elected official, including city council member (1983-1987) and mayor
(1987-1995) in Burnsville, Minn., and Minnesota State Representative (IR-Burnsville)
in District 36B, representing Dakota and Scott Counties, from 1995 to
2003. He served as House assistant majority leader from 2001 to 2002.
McElroy also has experience in the private
sector, serving as CEO for Travel Agency Management Solutions, Inc.;
president of Mainline Travel; and chief financial officer of Travel
Professionals. He has a B.A. in history from the University of Notre
The leisure and
hospitality industry in Minnesota generated $12.5 billion in gross
sales in 2012 and employed 245,411 people in private-sector jobs. (This
includes accommodations, food services and drinking places, arts,
entertainment and recreation.)
The 10-county Twin Cities area generated $8.4 billion (67.4%) of
those sales and accounted for 156,742 (63.9%) of those jobs.
Central Minnesota counties generated $1.1 billion (9.0%) in
sales and accounted for 26,350 (10.7%) jobs.
Northwest Minnesota counties generated $513 million (4.1%) in
sales and accounted for 10,904 (4.4%) jobs.
Southern Minnesota counties generated $1.5 billion (11.9%) in
sales and accounted for 34,024 (13.9%) jobs. Rochester and the rest
of Olmsted County accounted for about one-quarter of these Southern
Minnesota sales and jobs.
Northeast Minnesota counties generated $794 million (6.3%) in
sales and accounted for 16,483 (6.7%) jobs.
Sales at Minnesota leisure and hospitality
businesses grew by 54 percent from 2000 to 2012, including five
percent annual growth for 2012.
The leisure and hospitality industry
accounts for 11 percent of the state's total private-sector employment
and generates $4.3 billion in wages.
Some people say the way to be competitive is to have lower taxes,
while others say to be competitive the state should put more money
into foundational assets like schools, infrastructure, broadband, etc.
These opinions, Dan
McElroy said, reflect the two dimensions of competitiveness outlined
by Prof. Michael Porter, head of the Institute for Strategy and
Competitiveness at Harvard Business School. McElroy said he became
familiar with Porter's work on competitiveness when he was
commissioner of the Department of Employment and Economic Development
Porter maintains these two dimensions are
foundational competitiveness and investment attractiveness.
Foundational competitiveness is the collection of core public goods
(such as skilled employees, specialized infrastructure, technological
knowledge, etc.) an economy has to have to grow and thrive. Investment
attractiveness is businesses' perception of the cost and tax climate
of a location relative to its foundational benefits.
Minnesota competes for people and cultural
assets. McElroy said besides keeping companies in the state,
helping companies grow and attracting new companies, investment and
jobs, there are two other things Minnesota competes for:
1. People. McElroy said we compete to
keep Minnesota high school and college graduates here. When high
school graduates go out of state to college, they often don't return
to Minnesota. About 83 percent of students who attend Minnesota
State Colleges and University (MnSCU) institutions stay here. That
percentage is smaller among University of Minnesota (U of M)
graduates. "We also compete," he said, "for graduates of unique
programs that are among the best in the country, like the
watchmaking program at St. Paul College, the string instrument
program at Red Wing or the gunsmithing program at Pine City. We
don't keep many of those graduates."
"We also compete for our neighbors'
people," he continued. "With financial services in South Dakota, oil
in North Dakota and a wide variety of industrial efforts in Iowa,
competing for other states' people is more difficult." He said we
should also try to keep more of our older people here. Research
shows that cold-climate states lose wealth faster than other states,
as many people in their 60s leave. This is especially true for those
states with high taxes.
2. Cultural assets. McElroy pointed
out that we also compete to keep the Twins and the Vikings here, to
attract a renowned new music director for the Minnesota Orchestra,
to keep the best Orchestra musicians, to book popular Broadway plays
in the Hennepin Theater District and to secure highly esteemed art
The larger region, not individual states
within artificial borders, is the right context to think about
"I celebrate that North Dakota is doing well
with oil and gas," McElroy said, "or that farm prices mean our
surrounding agricultural states are doing well. It's good for the
region." As a transportation center, with the Great Lakes, the
Mississippi River and a strong rail network, we benefit from that
regional economic activity.
Brand is an important part of competition.
McElroy said the following questions can help define a metro
area's brand: Is the area "cool"? Does it have opportunities? Do kids
want to stay here for college or come back after college? What do
external people making decisions think of the brand of the metro area,
state and broader region? Do we have a great and vibrant art scene and
music scene? Part of our brand should note that we have more live
theater per capita than any other place besides New York City, McElroy
said. And he acknowledged that the Twin Cities and the state do have a
brand that is a little bit distinct from the larger region.
Communities have capital, just as
United Way has ranked Minnesota multiple times as the most caring
community in America. "We have the most robust foundation activity for
a community our size that I can imagine," McElroy said. "We have a
high participation in faith communities, in youth sports, in Boy
Scouts and Girl Scouts, and in Boys and Girls Clubs. All of that
cultural capital contributes to the nongovernmental capacity to
sustain a high quality of life, helps with brand and helps to sway the
decisions people make about whether to stay here or not."
There are two concepts of equity in taxes:
vertical and horizontal equity.
A tax system achieves vertical equity when the taxes paid
are progressive, that is, taxes increase with the amount of earned
income. The driving principle behind vertical equity is the notion
that those who are more able to pay taxes should contribute more
than those who are not.
economic theory that individuals with similar income and assets
should pay the same amount in taxes. Horizontal equity should apply
to individuals considered equal, regardless of the tax system in
place. The more neutral a tax system is, the more horizontally
equitable it is considered to be.
"I have encouraged diagonal thinking that
combines the fact that we must compete with the importance of helping
families who may be immigrants, have low income, or have no college
experience, to have the cultural and financial capital and the
educational momentum to be successful," McElroy said. "That helps us
compete on workforce issues and to be horizontally competitive."
Hospitality Minnesota and the Minnesota
Restaurant, Lodging and Resort & Campground Associations are concerned
about the minimum wage.
Note: The 2014 Legislature recently
passed a law to increase Minnesota's minimum wage to $9.50 an hour
by 2016, with yearly increases (starting in 2018) tied to inflation
(capped at 2.5 percent per year). The wage would increase in stages:
up to $8.00 in August 2014, followed by $8.50 in 2015, and $9.50 in
2016. With its current minimum of $6.15, Minnesota is one of only
four states beneath the federal minimum of $7.25 an hour. When fully
phased in, the state's new minimum wage could be in the nation's top
There will be certain exemptions from the
new $9.50 wage. Businesses with gross sales beneath $500,000 will
see the wage top out at $7.75 in 2016. Companies could continue
paying 16- and 17-year-olds less and 18- and 19-year-olds would be
subject to a training wage of $7.75 for 90 days.
"We don't object to the wage going up, but
$9.50 an hour will be among the highest minimums in the country,"
McElroy said. "There isn't much movement by states around us." He said
his associations agree with the StarTribune that $8.50 would
have been more reasonable. It matches what's being done in South
Dakota. The associations also care, he said, about trying to protect
jobs for people who get tips. Minnesota is one of seven states that
don't count tips toward the minimum wage. The groups tried to draft a
compromise on the issue of tips, he said.
The wage system used in the United Kingdom
has taken the minimum wage out of politics. He said the UK has
created an appointed
Low Wage Commission
comprised of accountants and representatives of organized labor and
business. The Commission sets the minimum wage through a process of
public hearings. Young workers who are 16 or 17 work at 60 percent of
the adult minimum wage and 18- or 19-year-olds work at 80 percent of
the adult wage, which kicks in at age 20.
An interviewer asked whether the UK model
could ever happen here. McElroy replied that it has gotten some
publicity, such as an article in The Economist, but it doesn't
have huge momentum here right now.
People work in the hospitality industry for
different reasons and with different motivations. McElroy said
there are people in hospitality industry jobs who are transitional:
they're finishing school, trying to find themselves, or putting a
spouse through school. "Some others are careerists and some land there
as a last resort," he said. "Some people love our industry because
they have flexibility in their hours." He pointed out that the best
opportunity for people wanting to make a career in the hospitality
industry is entrepreneurship. "You can still start a coffee shop for
not much money and with a lot of hard work," he said.
Some low-skilled hospitality workers earn more than the minimum
wage. An interviewer asked how the hospitality industry thinks
about the minimum wage issue related to those workers who are not
transitional and have very few skills, but are attempting to support a
family. McElroy replied that in many cases, these workers make more
than the minimum wage because of their seniority or because they will
work hours young people won't.
He said, for example, the prevailing wage in
downtown hotels for housekeepers is also the union wage of $12 or $13
an hour, even though very few hotels are unionized. Some hotels have
extra incentives if customer satisfaction scores are good. He said a
typical housekeeper is expected to clean 16 rooms per day. He noted
that some aspects of the hotel business have become more efficient
because of things like online reservations, but "there's really no way
to automate housekeeping."
Quality of life is not just economic. An
interviewer asked why communities strive to be competitive and what
that means. McElroy responded that he believes competition is good
because he cares about the quality of life for his family and his
neighbors. "Quality of life is not just economic," he said, which is
why cultural competitiveness and human capital competitiveness are
also important. He views competition as the result of the choices
people have. "We want to do those things that make us a good choice
for people making those decisions," he said.
Ninety-nine percent of our companies are
organized along old models. An interviewer asked whether Minnesota
could look at its company organization options and treat the
inheritance tax differently if the capital would remain employed
versus being taken out and "blown." McElroy responded that in the
early 2000s, Minnesota created a new way to organize business called
the equity cooperative. In that model, farmers put in the majority of
money for a business, but can have equity partners. It's been used
mostly for ethanol or biodiesel plants, but it's been expanded into
other types of businesses, as well.
Most hotel rooms being built in Minnesota
will sell for a little over $100 a night. An interviewer asked
about the drivers behind hospitality industry growth in Minnesota and
commented on the number of new upscale hotels. McElroy said upscale
hotels get lots of publicity, but most of the rooms being built here
are for brands like Holiday Inn Express, Hilton Garden Inn or
Courtyard by Marriott, with rooms that sell for a little over $100.
He said hotel occupancy has been very strong
in the metro area. It was over 70 percent in Minneapolis last year,
was extremely strong in the Rochester area, but was very weak along
I-90 in the southern part of the state.
McElroy said the economic drivers behind the
restaurant business are different from those in the hotel business.
"There's a surprising amount of intellectual capital in the restaurant
business, mainly with local owners and chef-driven concepts," he said.
But Minnesota doesn't have a lot of national restaurant brands,
because it doesn't allow recognition of tips as income.
It's important to take a regional approach
to economic development. An interviewer asked why Minnesota should
concentrate on taking a regional approach to economic development,
when so much of that activity around the country is focused on
providing financial incentives that fuel competition for businesses
and jobs among communities and among states. "Incentive chasers do
their customers some good and make a fair amount of money, but I don't
know that they do the economy any good," McElroy replied. He said the
oil and gas activity in North Dakota is good for the whole region and
if Minnesota decides to allow copper-nickel mining in the northeastern
part of the state, that will be good for the entire region.
"It would be a good thing if we could have a
regional approach," he said. "If fresh water becomes the oil of the 22nd
century, it should be thought of as a regional resource. Clean air may
become a critical resource. The ability to create cellulose may be a
new competitive structure. Those things are all regional."
States must invest in creativity. An
interviewer pointed out the importance of using creativity to develop
and then sell value-added products to increase an area's wealth. "What
made wealth in this area early on was making flour, not growing
wheat," he said and called for Minnesota to make investments in
McElroy responded that North Dakota is using
its oil income to make investments in its higher education system "to
catalyze future creativity, imagination, and
intellectual-property-based development." He noted that the University
of Minnesota's Natural Resources Research Institute invented taconite
and has also been involved in developing the metallurgy process that
would be used in processing copper-nickel in the state.
Emphasize early childhood education and a
sense of opportunity to develop a highly qualified workforce. An
interviewer asked where Minnesota should place its major emphasis in
order to have a highly qualified workforce. McElroy replied the
emphasis should be on early childhood education and preparation for
kindergarten. When the interviewer asked what can be done for young
people past that stage, McElroy said, "We must create a sense of
opportunity, a sense that it's worth staying in school and going to
college." He said a 16-year-old with a job is 50 percent more likely
to graduate from high school than one without a job.
He said he worries that publicity about
college debt might make college look unreachable. "To go to Normandale
Community College is affordable and a Pell grant will cover it," he
said. "There's not enough publicity about that. We don't do enough to
connect opportunity with what's possible."
The Civic Caucus
is a non-partisan,
tax-exempt educational organization. The Interview Group
includes persons of varying political persuasions,
reflecting years of leadership in politics and
business. Click here
to see a short personal background of each.
S. Adams, David Broden, Audrey Clay, Janis Clay, Pat Davies, Bill
Frenzel, Paul Gilje (coordinator), Randy Johnson, Sallie Kemper, Ted
Kolderie, Dan Loritz (chair),
Tim McDonald, Bruce Mooty, John Mooty, Jim Olson, Paul Ostrow, Wayne
Popham, Dana Schroeder, Clarence Shallbetter, and Fred Zimmerman