The current state of the economy is constantly revealing inequalities between the diverse demographic groups within our country. Wage and income disparities across the United States are barriers preventing Latinos from full economic participation that could have a multitrillion-dollar impact, further unleashing their entrepreneurial spirit, creating millions of jobs, driving consumer spending and building intergenerational wealth, according to the latest report published by McKinsey & Company in December 2021.
Latinos in America make up around 18.4% of the U.S. population and 17.3% of the U.S. labor force, a segment that is projected to grow to more than 30% by 2060. Latinos embody the spirit and reality of the American dream, but do not experience upward economic mobility the same as their non-Latino white counterparts. Even though Latinos create more businesses and have higher rates of intergenerational mobility, helping ensure that each successive generation is better off than the last, full economic participation in the American dream is still uneven.
Latinos face discrimination when it comes to obtaining capital to start and scale businesses. They continue to struggle with access to food, housing and other essential needs. 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, the COVID-19 pandemic continues to disproportionately impact Latino lives and livelihoods.
The McKinsey & Company report highlights four key areas to get a better understanding of the barriers Latinos face in America today. It found that Latinos face obstacles similar to those ultimately overcome by waves of immigrants before them. Income, wealth and intergenerational mobility are improving for Latinos over the generations, which is helping close the economic gap. But that is still not enough. Here is a quick summary of the report.
- The Latino workforce is growing, and they are doing the jobs no one wants to do. The report found that Latinos are projected to make up 22.4% of the U.S. labor force by 2030 and more than 30% 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 non-wage employer benefits, and disproportionately vulnerable to disruption.
The annual income gap of over $288 billion compared with non-Latino white workers represents a lost economic opportunity and has significant implications for Latinos’ ability to start businesses, build wealth and fully participate as consumers. By closing the income gap, Latino worker wages could be more than 35% higher and an additional 1.1 million Latinos could join the middle class.
- Latinos are starting businesses at greater rates, but fall short of their potential. According to the McKinsey & Company report, 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%) have started a new business every month, compared with 0.3% for the next highest groups (white and Asian). The number of Latino-owned employer firms has grown by 12.5% annually, compared with 5.3% 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% of the U.S. population, Latinos only own about 6% of employer firms and around 14% of non-employer 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 U.S. 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, 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% of Latino-owned firms close in their first year, compared with 10% for white-owned firms, and the gap persists over time. Latinos are also more likely to be sole proprietors: 92.5% of Latino-owned businesses are single-person firms, versus 83.1% of the total population on average. There are also gaps related to representation, revenue per firm, profitability and the number of employer businesses.
- The Latino consumer market is growing, but they are spending more on offerings that suit their needs best. The report also found that Latinos comprise about 18% of the U.S. population, but only account for 11.4% 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 U.S. population. In addition, McKinsey & Company’s research shows there is another $159 billion in unsatisfied demand because many Latinos would be willing to spend more on offerings better suited to their needs.
The spending gaps fundamentally stem from Latinos having lower incomes compared with non-Latino white Americans, with the net result that Latino households spend less, on average, in almost every product and service category. At similar income levels, Latino households spend a greater share on essentials compared with white households and are more likely to stick to a budget when shopping. In addition, many Latino communities have lower or inadequate access to key product and service categories, including food, housing, banking, broadband, healthcare and consumer goods. And there is unmet demand: Latinos are, on average, more dissatisfied with current product and service offerings than white consumers, especially in categories where they have limited access. And Latinos are likely willing to pay an average of 18% more — or 1.18 times the existing level of unsatisfied demand — for products and services that better meet their needs.
- Latino wealth is on an upward trajectory, but generations away from achieving equality. Another major finding in the research found that Latino wealth has grown by an average of around 7% annually for the past 20 years, more than twice the rate of non-Latino white wealth. Wealth is also increasing by generation, especially from the first generation to the second. In fact, children of foreign-born Latino immigrants experience higher economic mobility than their U.S.-born peers.
Yet, while Latino wealth is on an upward trajectory, it is far from equal to that of non-Latino whites. The median wealth of Latino households in 2019 was about $36,000, just one-fifth of the median $188,200 held by their white peers. Latino families are also significantly more likely to have a zero or negative net worth. in fact, 34% of Latino families are worth less than $10,000 (compared with 16 percent of non-Latino white families), while only around 3% of Latino families are worth more than $1 million, compared with 16 percent of white households.
The problem is that, while Latinos have higher rates of intergenerational mobility, they start from a much smaller base. And there are two other major differences between Latinos and non-Latino white households that may affect wealth, both related to family. First, Latinos are more likely to support family members in the United States when they have disposable income — 44% report using extra money to invest to help out a family member — and Latino millennials are significantly more likely than their non-Latino counterparts to provide financial support to family (7% versus 53%).
Second, 32% of Latinos send remittances to family outside the United States, with more than two-thirds of those sending up to 30% of their income abroad. These remittances deplete savings to the tune of an estimated $50 billion to $60 billion annually — and account for a third of all remittances sent from the United States to other countries. Latino household wealth could be about $18,000 higher if Latinos instead invested 40% of the average annual remittance value over ten years.
The McKinsey & Company research has found that Latinos are slowly being more fully integrated into the U.S. economy, but they also demonstrated more evidence that there is a long way to go, especially for first-generation Latino immigrants. The conversation about equitable economic recovery in this country is not only a moral obligation, but also a moral right and one that is in line with the essence of the American dream. This research shows a great opportunity to create policies for a sustainable economy that is more robust and accessible for anyone who wants to achieve their own dreams in America.
EDGAR RAFAEL OLIVO is a bilingual business educator, economic advisor, and contributor for several media outlets. He’s a nonprofit executive who is passionate about education. He is certified in finance and data analytics and holds a business degree from Arizona State University.
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