The Interplay of Economic, Social and Political Fragmentation

This paper examines how skill-biased growth can generate economic fragmentation (income disparities) that give rise to social fragmentation (the adoption of increasingly incompatible social identities and values), which generate political fragmentation (the adoption of increasingly incompatible economic policies). Our model of social fragmentation focuses on three values-driven identities: individualism (focused on status concerns), communitarianism (focused on the benefits of social affiliations), and multi-affilatedness (encompassing both individualistic and communitarian objectives). Our analysis shows how the high-, middle- and low-skilled people are drawn to individualistic, multi-affiliated and communitarian objectives, respectively. We show how skill-biased growth leads to an expansion of the individualistic and communitarian groups, at the expense of the tolerant multi-affiliates. Consequently, there is a narrowing of the moral foundations driving economic policy. We examine the conditions under which these developments increase size of the political constituency for protectionist-nationalist policies (which destroy productivity, compress the income distribution and promote the benefits of social affiliation).