The impact of neighbourhood ethnic concentration on ethnic minorities' outcomes is a contested topic, with mixed empirical results. In this paper, we use a large‐scale longitudinal dataset of England and Wales, covering a 40‐year period, to assess the impact of neighbourhood co‐ethnic concentration in childhood on subsequent adult labour market outcomes. We distinguish the five main minority groups in the UK and develop theoretical expectations about how social interaction mechanisms in the neighbourhood might influence their employment and social class outcomes, given different group (cultural values and ethnic capital) and individual (gender) characteristics. By separating in time explanatory and outcome variables and by controlling for factors that mediate or confound co‐ethnic concentration – such as neighbourhood deprivation, household resources in childhood (i.e. parental social class), and individuals' own education – our analytical model tackles potential problems of self‐selection and endogeneity. Among other findings, we show that greater concentration of co‐ethnics in the neighbourhood results in substantially lower labour market participation and lower social class for Pakistani and Bangladeshi women but better social class outcomes for Indian men. We link the outcomes for Pakistani and Bangladeshi women to cultural maintenance of more traditional norms, facilitated by greater social interaction. The results for Indian men, instead, suggest the positive role that high levels of group resources or ‘ethnic capital’ can play. Our study is, we believe, the first to demonstrate a role for co‐ethnic concentration in childhood in explaining Pakistani and Bangladeshi women's low labour market participation and Indian men's labour market success. Copyright © 2016 John Wiley & Sons, Ltd.