Inequality, Labor Market Segmentation, and Preferences for Redistribution

We formalize and examine two overlapping models that show how rising inequality combined with ethnic and racial heterogeneity can explain why many advanced industrial countries have experienced a drop in support for redistribution as inequality has risen. One model, based on altruism and homophily, focuses on the effect of increasing social distance between the poor and the middle class, especially when minorities are increasingly overrepresented among the very poor. The other, based on self-interest, combines an insurance model of preferences for redistribution with increasingly segmented labor markets, in which immigration of workers without recognized skills leaves most native workers better off but intensifies competition for low-end jobs. Empirically, when we estimate parameters from the two models using data from multiple waves of ISSP surveys, we find that labor market segmentation, previously omitted in this literature, has more consistent effects than social distance.