This paper is an application of Identity Economics. Since the literature in this field is recent, the paper begins with an extensive review of the key contributions. The current paper analyses the process and psychological costs of social polarisation arising from economic inequalities. It may have some application to the current social divisions evident in to the votes for Brexit and Donald Trump and protest movements such as the gilets jaunes.

In a simple model, people rationally maximise their utility from esteem, by selecting a subjective salient identity from two objective identities: nationality and job. The model shows how an increase in wages for the upper half of the population can lead those with high incomes to drop nationality as their salient identity, forming a new ‘elite’ class. This rational switch in the identity of high-income workers has both efficiency and redistributive effects, reducing aggregate utility and generating regressive transfers.

About the author

Paul Collier, Professor of Economics and Public Policy, Blavatnik School of Government