What will it take to boost Latino economic power?

By Lucy Pérez

In this episode of The McKinsey Podcast, senior partner Lucy Pérez talks with executive editor Roberta Fusaro about the findings of The economic state of Latinos in America: The American dream deferred—the firm’s inaugural report on this subject. She explains how greater support for Latino workers, business owners, consumers, savers, and investors in the United States could create economic opportunities not just for individuals and families in this demographic but also for the whole country.

After that, you’ll hear from Nimit Patel, a principal data scientist at McKinsey, about where his “random walk” (or career exploration) at McKinsey has led him.

This transcript has been lightly edited for clarity.

The McKinsey Podcast is hosted by Roberta Fusaro and Lucia Rahilly.

A personal connection

Roberta Fusaro: Lucy, thank you so much for joining us today.

Lucy Pérez: Thank you so much, Roberta. I’m really looking forward to the conversation.

Roberta Fusaro: So we’re here to talk about the economic state of Latinos in America, based on a McKinsey research report. I know you have a personal connection to some of this research, as your father owned and ran a few restaurants. How does his experience compare with today’s generation of Latino entrepreneurs?

Lucy Pérez: Indeed, the subject of this report is something that’s very personal to me. One of the statistics that most surprised me was the fact that one in 200 Latinos opens a new business each month. That is the highest degree of entrepreneurship that you see in any demographic group in the US. It was striking to think that my dad was one of those Latinos opening new businesses. I was the first one in my dad’s family to go to college. That was possible because of the growth and opportunity my dad created for us through his business.

As we dug into the data, we learned about how 72 percent of Latino entrepreneurs rely only on friends and family to support their businesses. That was the story for my dad and so many of his friends. When you think about the potential opportunity to invest in these entrepreneurs, to grow and have a stronger American economy for all, it’s a very exciting story.

Roberta Fusaro: The story does have so many hopeful elements to it, but as the report points out, it’s also complicated, right?

Lucy Pérez: We often talk about these very positive trends, like Latinos having the highest degree of entrepreneurship, or Latinos having a higher labor force participation rate than non-Latino Whites, or Latinos having increasing consumption power. But what these rosy indicators sometimes mask is how fragile this growth is. If we invest in these entrepreneurs, workers, and communities, we can drive a strong American economy for all. It is personal, but it’s also about our society as a whole.

Closing a $288 billion wage gap

Roberta Fusaro: I think what’s most practical and accessible about the report is that you’ve organized it around Latino workers, business owners, consumers, savers, and investors. I’m curious to hear about the challenges and opportunities for each of these groups. Let’s start with the Latino worker. How are we compensating workers currently?

Lucy Pérez: Today in the US, Latinos make up about 17 percent of the workforce. When we look at the numbers, what we see is that, on average, Latinos are paid 73 cents for every dollar that is paid to non-Latino White workers. If we were able to close this wage disparity, we would be talking about an additional $288 billion that would be supporting Latino workers. This could help move more than a million Latino families into middle-class standing.

Furthermore, if we were able to close the representation gap that exists in professions like academia, STEM ¹ -related careers, and careers requiring a professional degree, we could close half of this $288 billion. But the truth is that today, a large number of Latino workers are concentrated in low-paying jobs. By 2060, 30 percent of the US labor force will be Latino. So it becomes all the more paramount to think about how we make sure these workers have the right conditions to succeed not only for themselves but for their families and the US economy.

By 2060, 30 percent of the US labor force will be Latino. So it becomes all the more paramount to think about how we make sure these workers have the right conditions to succeed.

Lucy Pérez

How companies can support Latino workers

Roberta Fusaro: What can companies do, or what are they already doing, to bring in more Latino workers?

Lucy Pérez: What we’re seeing with organizations is that they’re looking at how to increase representation in their workforce at different levels. From the very top, we’re seeing an increase in diversity in board composition, though representation at the board level still significantly lags for Latino leaders.

We’re seeing this increase in recruiting targets for more diverse hiring in the entry-level positions. What’s also interesting is how companies are choosing to invest in helping to advance and promote workers through their different career levels. We’ve also seen many of our clients establishing partnerships with institutions that, for example, tend to have a higher proportion of Latino students and creating internships and other vehicles to create an easier path into the workforce to expand the talent pool.

Another clear area of opportunity, as we think about hiring for jobs, is how to do more skills-based hiring versus degree-based hiring. Increasingly, we see people learning skills in context, outside of academic degrees. That can be extremely valuable.

Roberta Fusaro: Generally speaking, how are today’s Latino youth faring compared with their parents?

Lucy Pérez: For Latinos, the concept of the American dream is ingrained in who they are, and this idea that the children do better than their parents. And when we were looking to see if the facts support this, what we see is that Latinos in general have rates of intergenerational mobility that are comparable to those of the White population.

Many businesses, too little capital

Roberta Fusaro: The number of Latino-owned companies has grown over the past five years at more than double the rate of White-owned firms. Yet Latinos still don’t have access to the same levels of capital. Why?

Lucy Pérez: One of the things that we learned about Latino entrepreneurs is they tend to have narrower networks that are more focused on family and friends. At the same time, when we look at private equity and venture capitalists, they’re investing less than 5 percent of their capital in Latino-owned business firms. So we clearly have an opportunity here to connect the dots between this growing number of entrepreneurs and those investors.

One of our clients, a financial institution, made a customer offering specifically for these entrepreneurs to drive greater growth in small businesses owned by Latinos. And that has turned into a significant vector of growth for that banking institution—so much so that the CEO spoke of Latinos as their hidden growth opportunity in several of his communications to employees.

A $660 billion consumption gap

Roberta Fusaro: I want to shift our focus now to the Latino consumer, another segment in the report. In the report, we note that although consumption among Latinos in the United States has grown about 6 percent per year for the past eight years, there’s still this $660 billion in unmet demand each year. What accounts for such a huge number?

Lucy Pérez: The consumption gap that exists today is quite significant. Those $660 billion are the result of a couple of factors. On one hand, it is about lacking the goods and services that meet the needs of Latinos—not having those accessible, for example, in the neighborhoods that they live in. We know that Latinos are more likely to live in what we call “healthcare deserts” or “banking deserts.” These are areas where the provision and availability of healthcare or banking services, for example, are lower. And Latinos may be spending more on average, for example, to secure housing in these areas.

So that’s one part of the equation. The other part of the equation is that the willingness to pay for goods and services is very different for Latinos relative to other groups. What we find is there are certain categories where Latinos would be willing to pay more, should they find the right provisions and services for their needs.

Roberta Fusaro: Are there specific first steps that companies and government organizations can take to help improve the situation or close that gap?

Lucy Pérez: There are several steps that can be taken to close that consumption gap. One is focusing on the consumer insights of organizations in order to serve the needs and wants of this Latino population that by 2050 will be one in four Americans. We must answer the question, “Are we designing goods and services to meet those needs and preferences?”

The second step is thinking about how these goods and services are provided. Do we have mechanisms to meet these consumers where they’re at? Are we choosing to place our locations in geographies that make them more accessible to these consumers?

The obstacles to accumulating wealth

Roberta Fusaro: In the report, you also talk about the opportunity for Latino wealth creation. Latino wealth is on an upward trajectory, but there is still lots of ground to cover. Tell us about that.

Lucy Pérez: The trajectory in Latino wealth creation is positive. But the challenge, again, is that we’re starting from such a small base when we look at this population. The median net worth of a Latino family is only about $36,000. When you compare that with what it is for a non-Latino White family, it’s almost five times that: closer to $200,000. What drives the majority of this gap is inheritance or intergenerational transfers—wealth that’s passed from one generation to the next.

We see a much lower rate of that happening for Latinos because Latino household wealth starts from a much smaller base. That is also driven by those lower wages we were talking about for the workers. The other factor that contributes to this lesser ability to have intergenerational wealth transfers is lower participation in the stock market. Less than 5 percent of Latino families have direct holdings of stocks. When you think about how much wealth has been created—even, for example, over the past decade or two—this is a vehicle that Latino families have not been able to tap into as much as other demographic groups.

Are there accessible educational resources?

Roberta Fusaro: When it comes to Latino savers and investors, are there good resources emerging that we could point listeners to?

Lucy Pérez: On one hand, you have financial institutions that are investing a lot more in building educational content and making resources available, particularly online, around how to access capital, how to save it, and how to invest it. That is one part of the equation. We’re also seeing community groups investing in educating the societies where they operate. They bring people together and facilitate exchanges of best practices and offer courses.

Increasingly, you’re seeing an interest from policy makers to shift more resources toward these underrepresented groups, making it easier for them to tap into capital opportunities. However, the resources may not always be accessible to the people who need them—by accessible, meaning not only physically accessible but in a way that is easy to understand and act on at the right time.

An opportunity for a stronger American economy

Roberta Fusaro: What is the broader macroeconomic opportunity that we’re looking at here?

Lucy Pérez: To me, the key part of the report is that this is an opportunity for America to build a stronger economy. This is not a Latino issue that we need to solve just for Latinos. I think about the fact that we can be creating six-plus million jobs for Americans by investing in these Latino entrepreneurs. We can create better products and services to benefit the needs of all American consumers, not just US Latino consumers. It is an exciting opportunity to drive that stronger American economy.

Latinos are polylithic

Roberta Fusaro: This is a first-of-its-kind report for McKinsey. What questions does this report raise that you’d like to tackle next?

Lucy Pérez: We chose to focus on the overall framework around wealth creation and how these different roles play off each other, as well as bringing in new data to understand that Latinos are not a monolith. We’d like to explore the differences between different groups of Latinos because of what generation they represent in the US or their country of origin. We want to continue to recognize the ways in which we can better serve the Latino consumer so that we can drive some of the growth we talked about, closing that $660 billion consumer spending gap that we see for this community.

We can continue to explore answers around what it will take to unleash Latino entrepreneurship at scale and drive investment dollars toward these Latino entrepreneurs so that they can create additional American jobs and a broader set of goods and services to benefit the community.

Roberta Fusaro: Lucy, this has been a fascinating conversation. Thank you so much for joining us today.

Lucy Pérez: Thanks so much, Roberta.