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A Changing World: The New Psychological Workplace Contract

Nov 13, 2023
3 min read
A bridge midway through construction, with both ends built and only the midsection still missing.

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 such as Uber Technologies, Lyft, Starbucks and Amazon 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. According to the National Labor Relations Board, Starbucks alone saw more than 7,000 employees file for union elections by July 2022—up from near zero just one year earlier. As a result, 360 Starbucks stores have unionized to date.

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). 

In the US, Strike Activity Has Picked Up After a Long Lull
Number of Workers Involved in Strikes (Million)
Striking workers plunged in the 80s and continued to decline until 2018. 2023 levels are about equal to the early 90s.

September 2023 and October 2023 data are estimated. As of October 31, 2023
Source: Barron’s, ILR Labor Action Tracker and US Bureau of Labor Statistics’ Work Stoppages program 

One of the hallmarks of the shifting psychological contract is the increase in collective action taken by workers outside of the traditional union model. Thus, even where unions are not being formed, groups of employees are gathering collectively to discuss issues that affect the entire organization. Sometimes, these take the form of employee resource groups comprising employees with a shared set of interests. Other times, workers may collectively place pressure on employers to act on political or social issues.

Investors Should Take Heed of Collective Actions

Tension between employers and workers is nothing new. As the labor market weakens or strengthens, it’s normal to see workers’ power ebb and flow. But in our view, the new psychological contract is more than a response to cyclical economic conditions. It reflects a confluence of social, political, generational and, yes, even economic forces that should give it staying power—even when the labor market weakens. 

And given today’s evolving psychological contract, traditional labor-relations tools and processes may no longer be sufficient. Across industries, companies are under pressure to develop new organizational strategies aimed at addressing the new set of employee expectations. This is upending the delicate balance between workers and their employers.

In the coming years, we believe investors will need to reconsider how companies address employment and labor relations. Traditionally, firms have managed their workforces with an eye toward company-specific concerns. But as employees become more vocal in their expectations, investors should expect the line between external public relations and internal labor relations to become hazier. 

Investors will also need to come to terms with the scale of unionization, which is no longer occurring on a one-off basis. Collective actions are likely to continue expanding into industries not traditionally associated with organized labor. This trend could materially affect labor costs, organizational structures and operational strategies. 

It could also benefit employers. Across many decades, voluntary turnover in unionized organizations has been shown to be lower than with non-union employers, while productivity is also higher in a number of different settings and industries. 

Regardless, collective actions are here to stay, and the demarcation lines between labor and management are shifting in ways that few could have imagined in decades past. With the boundaries blurring, investors will need to sharpen their focus. 

The authors would like to thank Roxanne Low, ESG Analyst with AB’s Responsible Investing team, for her invaluable contributions. 

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Author

Ariel Avgar is a David M. Cohen Professor of Labor Relations, Law and History at the ILR School at Cornell University and is a Senior Associate Dean for Outreach and Sponsored Research. His research focuses on two primary areas within employment relations. First, Avgar explores the role that employment relations factors play in the healthcare industry. As such, he examines the effects of a variety of workplace innovations, including new technology, delivery of care models and innovative work practices, on patients, frontline employees and organizational performance. Second, Avgar studies conflict and its management in organizations with a focus on the strategic choices made by firms. He seeks to better understand the consequences of conflict for employees and employers. In addition, Avgar’s research investigates the adoption and implementation of organizational-level conflict management practices and systems. He served as law clerk for the president of the Israeli National Labor Court before being admitted into the Israeli Bar. Prior to joining ILR, Avgar was an associate professor (2014–2016) and assistant professor (2008–2014) at the School of Labor and Employment Relations at the University of Illinois at Urbana-Champaign. He holds a BA in sociology and an LLB in law from Hebrew University, and a PhD in industrial relations from the ILR School at Cornell University. Avgar’s research has been published in a number of journals including ILR Review; Industrial Relations; British Journal of Industrial Relations; Ohio State Journal on Dispute Resolution; International Journal of Conflict Management; International Journal of Human Resource Management; Negotiation and Conflict Management Research; Advances in Industrial and Labor Relations; Health Services Research; and Medical Care. He received the 2008 Best Dissertation Award and the 2013 John T. Dunlop Scholar Award, both from the Labor and Employment Relations Association, and he serves as the editor-in-chief for the association. Avgar’s paper (with Eric J. Neuman) titled “Blind Spots and Mirages: A Dyadic Approach to the Study of Team Conflict” received the 2012 Best Paper: New Directions Award from the Academy of Management's Conflict Management Division.