A Changing World: The New Psychological Workplace Contract

A new psychological contract is transforming the modern workplace, highlighted by an increase in collective actions and changing employee expectations.

A central feature of the employment relationship is the set of expectations that employers and workers have of one another. Sometimes less visible are the expectations that workers have of their employers. It’s all part of a psychological contract between employers and their workers. We are currently undergoing a fundamental change in the core foundation of the existing psychological contract—one that is likely to have material implications for investors.

The Importance of Psychological Contracts at Work

Irrespective of industry, workers and their employers operate within the context of a general psychological contract—informal, implicit, trust-based agreements about reciprocal commitments and expectations. Although they’re stable in the short run, these unwritten contracts evolve and shift over decades.

Traditionally, psychological contracts have been internally focused. Employers were willing to offer their employees job security, competitive pay and mobility within the firm in exchange for effort, commitment and company loyalty.

Owing to competitive pressures, psychological contracts in the developed world began to change in the late 1990s. In an effort to adapt to changing employer needs, the terms of the psychological contract were revised to include providing transferable job skills and real-world experience in exchange for effort and employee engagement.

At the same time, companies weakened job security and abandoned long-term commitments like defined benefit pension plans. Firms also shifted their focus from job security to employability security. Perhaps not surprisingly, employee loyalty declined as these pacts became less relational and more transactional.