Macroeconomic drivers of household income growth Exploring heterogeneity across subpopulations via latent class modeling

Which macroeconomic factors drive household income growth and to what extend are these driving forces heterogeneous across different subpopulations, were the central questions of this research. To answer these questions, a latent class model has been estimated. Whereby new parameter values in the maximization step of the expectation-maximization algorithm where determined via the outlier robust generalized method of moments estimator of Lucas et al. (1997). Households were generally segmented into one group with average and stable incomes and one or two other groups with below average and volatile incomes. The effect of income inequality was generally negative for the latter group, while it was positive for the first group. Redistribution and gross domestic product growth usually had no significant effect. Hence, redistribution is a good tool to lower inequality and therewith support overall income growth.