We do not HAVE to make labels but it seems that people like to make them for various reasons I am sure people can add to this list but here are a few thoughts
1. People like to feel like part of a club. If everyone else in the club is good I must be good too. If I am a Yankee fan and the Yankees are doing well I must be a winner.
2. It helps us categorize things in life. The same way we deal with all people we meet. You meet someone and try to decide if you want to get close to them. You slap a label on their forehead and say in your mind “you are a nerd, greasball, frumak, JAP, rich, weird, smart, black, cool, bad dresser etc. and therefore I will or will not associate with you”
3. It is easier on the brain. When you read an article or listen to a speaker, you don’t need to think about the points they make. You can just label the writer or speaker by saying that he is a liberal, a frummy, chasidishe, not frum, etc. and therefore I do not need to consider the intellectual points he is making.
4. It gives us a sense of identity to make us think we know ourselves
5. It gives us a false sense of pride (e.g. “everyone knows that Yekkes have the most authentic mesorah and therefore I must be doing the right thing)
Labels are not used exclusively by Jews but it could be that we rely on them more than the rest of the world and that our labels are much more detailed than any one else. Try explaining to a gentile that you can judge a person’s religious affiliation by looking at the size, material, color of his yarlmuka. He will think you are nuts