Upward mobility is primarily driven by labor income but almost never by capital alone

Understanding the drivers of income mobility is a central question in economics, as individuals’ incomes come from both labor and capital sources. While factor shares have received attention, their role in shaping relative income mobility has been largely overlooked.

In this paper, Marco Ranaldi, Joël Bühler, and Roberto Iacono study the dynamics of capital and labor income mobility using high-quality register data from Norway, covering nearly 300,000 individuals observed over 26 years. They introduce a novel framework to decompose total income mobility into its capital and labor components across the life cycle.

KEY FINDINGS

• Measures of labor and capital income mobility do not provide clear orderings, since only a subset of measures indicate higher mobility of labour income.
• Upward mobility is mainly driven by labor income and by joint upward mobility in labor and capital.
• Downward mobility is largely driven by capital income and by joint downward movements in labor and capital.
• Labor income tends to systematically lift individuals up the distribution (via life-cycle and human capital dynamics), whereas capital income, being more volatile and concentrated, is more often associated with downward shifts.

AUTHORS

• Marco Ranaldi, University College London
• Joel Buhler, University of Barcelona
• Roberto Iacono, Norwegian University of Science and Technology, World Inequality Lab