The real reason incomes rise and why they drop

Norway stands out for having relatively high income mobility. Many people are able to improve their financial standing, but the system also allows incomes to fall. Movement 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.

While economists have long studied income mobility, there has been much less focus on how different income sources contribute to these changes. In particular, the distinct roles of earnings from work and income from capital have not been closely examined.

That gap led Iacono and his colleagues to ask two key questions. What helps people move up financially, and what causes them to fall behind compared with others?

Jobs Are the Main Driver of Income Gains

To find answers, Iacono worked with Marco Ranaldi from University College London and Joël Bühler from Universitat de Barcelona. The team analyzed detailed records from Norway's income registers (Statistics Norway), covering nearly 300,000 people aged 26 and older. They also developed a new approach to track how labor income and capital income influence earnings over an entire working life.

The results were clear.

"When people's income increases compared to others, it is largely due to what their earnings from work," Iacono said.

In practical terms, this means having a well paying job is the most important factor in getting ahead financially. Income from investments can help, but it rarely plays the leading role in long term income growth.

The picture changes, however, when incomes begin to fall.

Why Falling Incomes Are Linked to Capital

"When people's income declines compared to others, it is mostly due to the fact that their capital income is declining," says Iacono.

Losses from investments, property, or businesses tend to be the biggest reason people slip down the income ladder. These declines often happen at the same time as lower earnings from work, but capital income plays the dominant role.

For most people, steady employment remains essential for improving their financial position.

"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 Behave So Differently

According to Iacono, labor income and capital income operate in fundamentally different ways, which explains 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 very different 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. High income individuals receive a much larger share of their earnings from investments than the rest of the population. For the majority of people, wages and salaries remain the primary source of income.

Building Stability Through Work First

As a result, most cases of upward income mobility are 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 findings suggest that for most people, financial progress starts with stable earnings from work. Capital income may follow later, but it is rarely the foundation.