Over the past few years, the economic potential of the Hispanic segment has been influencing business strategies across America, and this past December, a new report released by the consulting firm McKinsey & Company added additional insights to the topic. The report, “The economic state of Latinos in America. The American dream deferred,” was authored by Lucy Pérez, Bernardo Sichel, Michael Chui, and Ana Paula Calvo.
The report focuses on four key areas associated with the Hispanic segment’s economic activity: Hispanics as workers, business owners, consumers, and business investors. The outcome? In all four segments of the analysis, the Hispanic segment demonstrates its continuous growth. However, the study also reports an existing economic gap in all four areas, which negatively impacts the Hispanic community and undermines the whole country’s economic growth.
I spoke with Lucy Pérez, senior partner at McKinsey & Company and co-author of the report, and here’s an edited version of our discussion:
Isaac Mizrahi – Why did McKinsey decide to invest in this study?
Lucy Pérez – We’re deeply committed to working on sustainable, inclusive growth and, more specifically, identifying ways to create a more inclusive economy. We’ve had a long history of working on the topic and recognize the importance of research and data to the discussion. By 2050, we know that 1 in 4 people in the US will be Latino – a significant population that can have an even greater impact on the US economy. It’s critical for us to ensure that access to services, leadership roles, capital, opportunities, and more are equal for all.
Mizrahi – Let’s start discussing each of the four segments covered by the study. Starting with Hispanics as workers, your study reports a $288 billion gap when compared to the non-Hispanic population. However, can 50% of this gap be explained by 4% of the professions?
Pérez – Latino labor-force participation is significantly higher than the other labor force participation rate. However, Latinos are concentrated in low-paying occupations, less likely to have non-wage employer benefits, and strikingly underrepresented in higher-paying occupations, compared to their share of the US labor force. Collectively, Latinos are underpaid by $288 billion compared with non-Latino white workers. 50% of this gap is concentrated in 4% of professions, including academia (including elementary and middle school teaching, postsecondary teaching), management, professions requiring postgraduate degrees (such as law and medicine), and STEM professions like software development. In a scenario of parity, wages for Latinos could be over 35% higher, and there could be 1.1 million more Latino families in the middle class.
Mizrahi – When it comes to Hispanic business owners, your study estimates that an incremental 735k new businesses could be created, employing almost 7 million Americans. What are the barriers driving this gap? Latinos have the highest rate of entrepreneurship of any group in the US, but they face significant barriers in starting and scaling their businesses.
Pérez – First, Latinos face challenges securing financing; they have the lowest rate of using bank and financial institution loans to start their businesses compared with other racial and ethnic groups. Even once established, Latino-owned employer firms continue to depend on personal sources of funding, making them potentially vulnerable to personal financial risk. Second, Latino entrepreneurs tend to have narrower professional networks and are less likely than their white counterparts to seek support and mentoring from professional advisers and colleagues instead of turning to family to support running the business and making decisions. Finally, Latino-owned firms are less likely to have a digital or online presence.
Mizrahi – When it comes to the consumer segment, your estimate is a gap in consumption of $660 billion. In your study, you wrote that one aspect of this gap was that “Many Hispanic communities have lower or inadequate access to key product and service categories, including food, housing, banking, broadband, healthcare, and consumer goods.” Why do you think this is happening?
Pérez – Many companies across sectors have under-invested in having a presence in areas with a high density of Latinos. Additionally, many companies have not aligned their offerings with the needs of Latino communities.
Mizrahi – Regarding the 4th segment, Hispanic as investors, is the household income gap the only factor for creating an estimated $380 billion gap vs. non-Hispanics?
Pérez – The largest driver of the gap is intergenerational transfers. Latinos are four times less likely to receive an inheritance than non-Latino Whites, and when they do, it’s more than three times smaller. The concentration of Latino workers in lower-paying jobs and the lower participation of Latinos in wealth creation vehicles like the stock market further contribute to this US$380 billion gap.
Mizrahi – It’s been almost five months since the release of this study. What has been the reaction?
Pérez – That is a great question. As you know, we released the report in collaboration with the Aspen Institute Latinos and Society Program and have had many public and private sector conversations on the report. One overwhelming reaction is that the magnitude of the opportunity for a stronger American economy is massive, and folks want us to do more – go deeper into specific categories to get a better understanding of what outcomes could be achieved if we come together. The other piece is on building bridges across the Latino and non-Latino communities to find how we can move the needle and make a real impact. Let’s take, for example, Latino entrepreneurs – Latinos are highly entrepreneurial even with their limited access to capital. Imagine what we could do together if we could open doors, not just for capital to help companies scale. And as a preview, we will be releasing our second version of the report later in the fall – so definitely much more to come.
Reports like this from McKinsey & Company bring an extra layer of attention to the Hispanic segment opportunity, given their credibility and the tremendous visibility they bring to this discussion. Moreover, companies like McKinsey connect to a management level that most Hispanic agencies and media companies have limited access to, like CEOs and Board of Directors.
Building a “more inclusive economy,” as described by Lucy Pérez, benefits all of us and makes America stronger. We hope this report can accelerate the discussion on how to move from identifying the gaps and opportunities the Hispanic segment faces from an economic standpoint to the time of action to close these gaps.