By Lucy Pérez, Bernardo Sichel, Michael Chui and Ana Paula Calvo / McKinsey & Company.
As a population, they increasingly embody —in spirit and reality— the American dream that hard work pays off and each successive generation will be better off than the one before.
Latinos make up 18.4 percent of the US population and 17.3 percent of the US labor force, a share forecast to rise more than 30 percent by 2060. Latinos start more businesses and have higher rates of intergenerational mobility, and their share of skilled and higher-paid occupations has increased in the past decade. As a population, they increasingly embody—in spirit and reality—the American dream that hard work pays off and each successive generation will be better off than the one before.
Yet America’s contribution to that dream is uneven. Latinos born in the United States enjoy higher wages and intergenerational mobility than foreign-born Latinos—suggesting Latinos may overcome the hurdles to full participation in their adopted country over time. Yet both US- and foreign-born Latinos remain far from equal with non-Latino White Americans. Latino Americans make just 73 cents for every dollar earned by White Americans. They face discrimination when it comes to securing financing to start and scale businesses. Latinos struggle with access to food, housing, and other essentials. And their level of household wealth—which directly affects their ability to accumulate and pass on wealth from generation to generation—is just one-fifth that of White Americans. Furthermore, COVID-19 had a disproportionate impact on Latino lives and livelihoods.
Our research finds Latinos are collectively underpaid by $288 billion a year. In a situation of full parity, they could spend an extra $660 billion annually. Latino businesses could generate an additional $2.3 trillion in total revenue each year, and 735,000 new business could be created supporting 6.6 million new jobs. And Latinos’ annual flow of net wealth from one generation to the next could be $380 billion higher.
Latinos face barriers similar to those ultimately overcome by waves of immigrants before them. Income, wealth, and intergenerational mobility are improving for Latinos over the generations, helping close the economic gap. But that isn’t enough. Policies and practices have led to Latinos being paid less than non-Latino White Americans within the same occupational categories—and even less for Latinos not born in the United States—and to having lower access to education, food, products, and services. But different choices can be made.
Latino workers: A striking generational gap
Latinos are projected to make up 22.4 percent of the US labor force by 2030 and more than 30 percent by 2060. Yet they remain concentrated in roles generally dismissed as “jobs no one else wants to do.” They are underpaid, less likely to have nonwage employer benefits, and disproportionately vulnerable to disruption. The $288 billion annual gap in income compared with non-Latino White workers not only represents lost economic opportunity but has significant implications for Latinos’ ability to start businesses, build wealth, and fully participate as consumers. In a scenario of parity, wages for Latino workers could be more than 35 percent higher and an additional 1.1 million Latinos could join the middle class.
The share of Latinos in skilled and higher-paid occupations has increased by almost five percentage points in the past decade. Yet Latino workers are overrepresented in lower-wage occupations, underrepresented in higher-wage occupations, and generally paid less than non-Latino White workers in the same occupational categories. And the annual median wage for foreign-born Latinos ($31,700) is even lower than for US-born Latinos ($38,848)—and both are significantly lower than the annual median wage of $52,942 for non-Latino White workers.
Latinos face barriers similar to those ultimately overcome by waves of immigrants before them. Income, wealth, and intergenerational mobility are improving for Latinos over the generations, helping close the economic gap. But that isn’t enough.
Foreign-born Latinos have historically accounted for a higher percentage of Latino workers in the United States than they do today. As more of the Latino population is US-born—the younger age profile of Latinos also contributes to higher birth rates—its percentage of the country’s workforce rises, and the economic gap with non-Latino White Americans will likely narrow.
Latino business owners: Thriving against the odds
Latinos start more businesses per capita than any other racial or ethnic group in the United States. Over the past five years, one in 200 Latinos (0.5 percent) have started a new business every month, compared with 0.3 percent for the next highest groups (White and Asian). The number of Latino-owned employer firms has grown by 12.5 percent annually, compared with 5.3 percent for White-owned employer firms. And while Latino-owned employer businesses are concentrated in cities and states with large, dense Latino populations —such as Los Angeles, Miami, and New York City -45 of 50 states saw an increase in Latino-owned businesses from 2012 to 2017.
Yet the share and the performance of Latino-owned businesses fall well short of their potential. Despite accounting for about 18.4 percent of the US population, Latinos only own about 6 percent of employer firms and around 14 percent of nonemployer firms. If Latinos’ share of employer business ownership reached parity with their share of the population, some 735,000 new enterprises could be added to the US economy, supporting 6.6 million new jobs. And if the per-firm sales of those businesses were in line with those of non-Latino White-owned businesses,12 an additional $2.3 trillion in total revenue could be generated.
Even though Latinos have the highest rate of entrepreneurship, there are significant differences between Latino employer firms and non-Latino employer companies. Nearly 13 percent of Latino-owned firms close in their first year, compared with 10 percent for White-owned firms, and the gap persists over time. Latinos are also more likely to be sole proprietors: 92.5 percent of Latino-owned businesses are single-person firms, versus 83.1 percent of the total population on average. There are also gaps related to representation, revenue per firm, profitability, and the number of employer businesses.
What barriers drive these gaps? First, while Latino owners of employer businesses have similar credit scores to their White counterparts, they still face challenges securing financing. Latinos have the lowest rate of using bank and financial institution loans to start their businesses compared with other racial and ethnic groups—12 percent compared with 17 percent of White employer businesses —and are less likely than White-owned employer businesses to receive all the funding they apply for. In addition, Latinos rely more on family savings, credit cards, and personal assets to start businesses, and are less likely to apply for additional funding because they don’t think they will receive approval. Some 26 percent of Latino entrepreneurs believe their Latino heritage limits their ability to access capital.
Even once established, Latino-owned employer firms continue to depend on personal sources of funding, making them potentially vulnerable to personal financial risk. The top funding sources for Latino-owned employer businesses seeking more than $100,000 tend toward personal savings, credit cards, and assets, while White-owned employer businesses look to secured loans from national or local banks. Accessing venture capital is also challenging: companies founded by Latino and Black owners represent around 2.5 percent of funding.
Second, Latino entrepreneurs are less likely than their White counterparts to seek support and mentoring from professional advisers and colleagues, instead turning to family for support on running the business and making decisions. And, finally, Latino-owned employer businesses are less likely to have an online presence. About 93 percent of Latino-owned employer businesses have no e-commerce sales, compared with 89 percent for White-owned employer businesses, which may place them at a disadvantage as the world goes increasingly digital.
Latino consumers: America’s growing domestic market
Latinos make up about 18 percent of the US population, but only account for 11.4 percent of aggregate consumer spending. While that amounts to around $870 billion in consumer expenditure annually, it could be around $500 billion higher if Latinos’ expenditures matched their share of the US population. In addition, our research shows there’s another $159 billion in unsatisfied demand, because many Latinos would be willing to spend more on offerings better suited to their needs.
Yet despite these headwinds, Latino consumption is growing by 6 percent a year, steadily increasing the population’s share of total US consumption by 3 percent annually for the past eight years. That growth has been propelled by an increase in the number of high-income Latino households: households with income of more than $75,000 have grown at a compound annual rate of 6.6 percent over the past decade. And Latinos are likely willing to pay an average of 18 percent more—or 1.18 times the existing level of unsatisfied demand—for products and services that better meet their needs.
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