Why do some people steadily climb the income ladder while others suddenly slip backward?
Economists use the term “income mobility” to describe how much a person or family’s income can change relative to others in the same society. It captures how likely people are to move up financially or slip downward over time.
Norway is known for having relatively high income mobility. Many people are able to improve their income level, but declines are also common. Movement along the income scale goes in both directions.
“Your income is the sum of what you earn from work and from capital income,” says Professor Roberto Iacono at the Norwegian University of Science and Technology’s (NTNU) Department of Social Work.
Capital income refers to money earned from assets such as shares, housing, or business ownership.
Although income mobility has long been a central topic in economics, researchers have paid less attention to how different income sources influence these changes. In particular, the separate roles of earnings from work and income from capital have not been thoroughly examined.
That gap prompted Iacono and his research team to take a closer look. They set out to understand what helps people rise financially and what causes incomes to fall compared with others.
Work Income Drives Most Upward Mobility
To investigate, Iacono collaborated with Marco Ranaldi from University College London and Joël Bühler from Universitat de Barcelona. The researchers analyzed detailed data from Norway’s income registers (Statistics Norway), covering nearly 300,000 individuals aged 26 and older. They also developed a new method to track how labor income and capital income affect earnings throughout a person’s working life.
The findings were clear.
“When people’s income increases compared to others, it is largely due to what their earnings from work,” Iacono said.
This means that steady employment and higher wages play the biggest role in helping people move up the income ladder. Income from investments can add to financial progress, but it rarely determines long term success on its own.
The situation looks very different when incomes begin to decline.
Capital Income Plays a Bigger Role in Declines
“When people’s income declines compared to others, it is mostly due to the fact that their capital income is declining,” says Iacono.
Losses in capital income often explain why people fall behind financially. These declines frequently occur alongside drops in employment income, but changes in capital income tend to have the strongest impact.
For most people, paid work remains essential for improving their financial position relative to others.
“Labor income systematically lifts individuals up in comparison to others. Capital income, which is more unstable and concentrated, is more often associated with decreasing income,” Iacono said.
Why Labor and Capital Affect Income So Differently
According to Iacono, labor income and capital income behave in very different ways, which helps explain their contrasting effects on income mobility.
“Employment income often increases gradually throughout life, such as when we gain more experience, switch to better jobs, or increase our skills. These processes mean that many people’s incomes increase over time,” he said.
Capital income follows a less predictable pattern.
“Capital income is more unevenly distributed; it fluctuates a lot and can easily fall if the markets go down or an investment fails. A few earn very well on capital, but for most this is more uncertain and more often results in a decline than sustained growth,” Iacono said.
Access to capital also varies widely across the population. High-income individuals receive a much larger share of their earnings from capital than others. For the majority of people, wages and salaries remain the primary source of income.
Long Term Progress Starts With Work
As a result, upward income mobility for most people is driven by employment income, either on its own or alongside smaller amounts of capital income.
“Lasting progress in an income position is usually based on solid income from work, which can later make it possible to save and earn more capital,” he said.
The research suggests that financial stability and progress usually begin with reliable earnings from work. Capital income may follow later, but it is rarely the foundation.
Reference: “Capital and labor income mobility” by Marco Ranaldi, Joêl Bühler and Roberto Iacono, World Inequality Lab.
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1 Comment
“This means that steady employment and higher wages play the biggest role in helping people move up the income ladder.”
This overlooks the very real problem of age discrimination that tends to occur around middle-age. It is particularly troublesome for professions like engineering where it is often perceived that middle-aged men have aged out of their most creative years and have started to become obsolete because of the rapid pace of technology. The problem is exacerbated by the common perception that “diversity, equity, and inclusion” are of more importance than competence in STEM fields.
It will be interesting to see how society reacts to computers taking over the other kinds of jobs where creativity and technical competence is less important than routine, and the percentage of unemployable people increases.