Most human variation is structured around symbolically marked cultural ('ethnic') groups that require common codes of communication. Consequently, many have hypothesised that using others' linguistic competences as markers of their descent is part of an evolved human psychology. However, there is also evidence that the use of language as ethnic markers is not universally applied, but context specific. We explore the tension between these views by studying responses to bilingualism among 121 adults living in Mayan communities undergoing rapid socioeconomic changes involving increased contact with Spanish-speaking towns. We show that, although competences in Mayan were strongly tied to perceiving others as having a Mayan ethnic identity, ethnolinguistic category membership was not seen as stable through life, vertically transmitted, nor regarded as incompatible with competences in Spanish. Moreover, we find variation in how people reasoned about ethnolinguistic identities depending on their own linguistic repertoires. Our work suggests that, while there may be an evolved predisposition to use language as a signal of group identity, our developmental plasticity allows us to respond adaptively to social information around us, leading to psychological and behavioural variation within and across populations. How people reason about others based on their linguistic profiles will affect the payoffs of acquiring different languages and ultimately the long-term sustainability of linguistic diversity.