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.
The New Values-Based Psychological Contract
Today, the psychological contract at work may be undergoing another once-in-a-generation change. Emboldened in part by the tight labor market of recent years, employees are using their newfound leverage to craft a new contract—one that focuses more on worker expectations than merely on employer needs.
Key among these expectations is that employers take a firm stand on political and value-based debates. These include issues like social justice; diversity, equity and inclusion (DEI); human rights; sexual harassment; and a range of political issues, such as voting rights. As a result, the boundary between work-focused activities and social causes is blurring in ways that are upending existing organizational models.
A case in point: In 2021, leaders of more than 100 firms issued public statements voicing opposition to voter suppression efforts in the US—due in part to pressure from their own employees. And, following nationwide protests and social movements during the height of the COVID-19 pandemic, many companies responded with enhanced investments in DEI initiatives.
As part of the new psychological contract, workers also expect employers to allow for individual expression and to accommodate family commitments and work-life balance. Increasingly, this includes flexible work arrangements, which would’ve been unheard of only a few years ago. The shifting power dynamic is prompting employers to accede to workers in fundamentally different ways.
And what happens when employees’ needs aren’t being met? This is perhaps the most impactful dimension of the new psychological contract—an expectation for collective representation in the workplace.
Collective Actions Are on the Rise
In many parts of the developed world—particularly the US—collective actions are gaining steam. This has taken on different forms, including a resurgence in traditional unions; representation petitions within industries not historically associated with unions; and even the growth of employee resource groups. In some cases, the movement is still in the early stages. In recent years, a number of well-known companies have seen an uptick in collective actions.
In fact, since the pandemic, there has been a 40% increase in worker activism—primarily in the form of petitions to unionize.
To be sure, the US is still well behind its contemporaries, however, making it an exception in its low union membership and coverage rates. This divide stems in part from less-restrictive legal frameworks in Europe and, in some cases, the involvement of European unions in the administration of social benefits like unemployment insurance. By contrast, right-to-work laws and a host of other factors have created structural barriers in the US that have contributed to declining union membership over the past 50 years.
But even with these barriers, the US is seeing a resurgence in collective action, sometimes within the traditional union model, and sometimes in alternative collective representation forms (Display).
