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REDEFINING PSYCHOLOGICAL CONTRACTS

WITH THE U.S. WORK FORCE:
A CRITICAL TASK FOR STRATEGIC HUMAN
RESOURCE MANAGEMENT PLANNERS
IN THE 1990S

Robert Singh

The well-publicized waves of layoffs in recent years have destroyed the long-standing
psychological contract between employees and their employers which promised pay, pro-
motion, and job security in exchange for worker skills, effort, and loyalty. This article
provides empirical support for the transformational effect layoffs have had on psycho-
logical contracts and discusses the critical role human resource management must play
in establishing and developing new contracts to guide future employment relationships
between employers and employees. Implications for both academics and practitioners
are provided. © 1998 John Wiley & Sons, Inc.
■

Introduction maintaining profitability, increasing produc- By itself, or as a

There can be no doubt that workers in the
United States are facing new levels of angst
created by economic uncertainty. Afford-
able, increasingly powerful computer and in-
formation technologies and heightened global
competition have dramatically altered the
marketplace. Corporations are placing a pre-
mium on top management’s ability to navigate
through turbulent competitive and economic
waters (Sherman, 1993; Tichy, 1987). As a re-
sult, executives are defining new management
approaches and organizational forms better
suited to meet the increasingly competitive
global economy (e.g., Burack, 1993; Tichy,
1993). By itself, or as a component of other
corporate change strategies, downsizing has
become one of the most popular methods of
tivity, and/or breaking down long-standing bu- component of
reaucracies. other corporate
change strategies,
Since 1990, over 2.2 million U.S. workers downsizing has
have been laid off (Serwer, 1995). While lay- become one
offs traditionally have been reserved for man- of the most
ufacturing workers (Cascio, 1993), recent popular methods
downsizing efforts have taken aim at white- of maintaining
profitability,
collar workers. Over 500,000 U.S. managers
increasing
with salaries over $40,000 lost their jobs in productivity,
1993 (Cameron, 1994). In fact, middle man- and/or
agers made up 18.6% of all layoffs from 1988 breaking down
to 1995, although they constitute less than long-standing
bureaucracies.
10% of the work force (Seppa, 1996). These
numbers highlight the fact that more and
more average middle-class Americans are los-
ing their jobs in record numbers.
In the popular press, horror stories
abound about the negative effects layoffs have

Human Resource Management, Spring 1998, Vol. 37, No. 1, Pp. 61–69
䊚 1998 John Wiley & Sons, Inc. CCC 0090-4848/98/010061-09
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62 • HUMAN RESOURCE MANAGEMENT, Spring 1998
had on the U.S. work force. Downsizing is
usually a dramatic, and often traumatic, expe-
rience which may result in a number of
different psychological responses from those
involved. For example, loyalty toward compa-
nies and perceptions of job security often di-
minish (O’Reilly, 1994); commitment to orga-
nizations is reduced as both victims and
survivors feel a sense of betrayal and mistrust
(Yates, 1993); and managers who must cut
staff often complain of guilt (Kirk, 1995) and
burnout (Smith, 1994). Other resulting reac-
tions from downsizing include increased anxi-
ety and stress, concerns about the future, and
in more severe cases, intense feelings of loss,
grief, and depression (Clark & Koonce, 1995).
All of these negative effects of downsizing
have been a part of the destruction of exist-
ing psychological contracts (Rousseau, 1989;
Schein, 1980) between workers and their em-
ployers in the United States.
The psychological states of employees are
important factors in determining their be-
havior and responses at work, and it is at least
in part through the management of these
states that organizational effectiveness can be
achieved. Highly committed employees usual-
Research has ly work harder and better than frustrated ones
shown that if (Etzioni, 1964; Meyer, Paunonen, Gellatly,
the psychological
Goffin, & Jackson, 1989). An organization
contract is
violated, that alienates workers through its practices
employee and develops a reputation as a “company that
turnover doesn’t care” will be less effective and less ef-
intention may ficient. It is likely that a potentially traumatic
increase and
experience such as downsizing will change the
commitment to
the organization way a person thinks and feels about his/her
may decrease next job, and the expectations of employer re-
(Guzzo, Noonan, sponsibilities. Further, the psychological ef-
& Elron, 1994). fects of experiencing a layoff can increase
stress, lower organizational commitment (to
future employers), and may have a lasting ef-
fect on individual work effort and perfor-
mance. As the number of downsized U.S. citi-
zens grows, firms that hire these individuals
must be prepared to deal with this dramatic
shift in psychological contracts because re-
search has shown significant relationships be-
tween stress and turnover (Parasuraman & Al-
luto, 1984), stress and performance (Beehr &
Newman, 1978), and commitment and per-
formance (Meyer, Paunonen, Gellatly, Goffin,
& Jackson, 1989).
While there has been growing academic
and practitioner interest in psychological con-
tracts in recent years, there are still relatively
few empirical studies to support theoretical
discussions of the topic—particularly when it
comes to the specific effects of downsizing on
psychological contracts. The purpose of this
article is to provide basic empirical support for
the proposition that downsizing impacts psy-
chological contracts and to discuss the grow-
ing importance of strategic human resource
management to address this issue. Implica-
tions for both academics and practitioners are
provided.
Psychological Contracts
Psychological contracts are individually held
beliefs about the mutual obligations of
employers and employees (Rousseau, 1989;
Schein, 1980). Research has shown that
these highly subjective perceptions of employ-
er–employee obligations do change over time
(Robinson, Kraatz, & Rousseau, 1994;
Rousseau & Parks, 1993). Guzzo & Noonan
(1994) have described “triggers” that can lead
to breaches in the psychological contract.
Based on their discussion of triggers (they de-
scribe a downturn in the firm’s performance),
downsizing is certainly a trigger that can affect
psychological contracts.
In the past, employees exchanged cooper-
ation, conformity, and performance for tenure
and economic security. This highly dependent
relationship virtually assured employee loyal-
ty. A rapidly changing economic and competi-
tive environment, however, has forced a
dramatic revision in psychological contract
provisions (Burack, 1993; Burack & Singh,
1995; DeMeuse & Tornow, 1990). The new,
emerging contract is now contingent upon
company profits, independence, and a strong
economy.
Research has shown that if the psycholog-
ical contract is violated, employee turnover in-
tention may increase and commitment to the
organization may decrease (Guzzo, Noonan, &
Elron, 1994). It has also been shown that lay-
off survivors who had previously felt high com-
mitment toward an institution, but subse-
quently perceived themselves as having been
WD6207.061-070 2/11/98 2:53 PM Page 63
FIGURE 1. Effect of layoffs on victims.
treated unfairly by the institution, exhibited
more negative reactions (lower organizational
commitment, decreased work effort, higher
turnover intention) than those with lower lev-
els of prior commitment (Brockner, Tyler, &
Cooper-Schneider, 1992). Overall, individuals
who were highly committed to an organization
reacted much more negatively to a layoff than
less committed employees when the perceived
fairness of the layoff was low—obviously, seri-
ous implications for managers.
Much has been written about “survivor
syndrome” (Brockner, 1988; Kirk, 1995) and
the effects of layoffs on survivors (e.g., Brock-
ner, Tyler & Cooper-Schneider, 1992; Brock-
ner, Konovsky, Cooper-Schneider, Folger,
Martin & Bies, 1994; Mone, 1994); however,
the effects of broken psychological contracts
on victims should not be overlooked. The in-
dividuals who have lost their jobs do not sim-
ply disappear; they remain in the work force,
and most will find jobs with other companies.
In fact, many victims may be coveted by small-
to middle-sized entrepreneurial ventures and
niche firms because of their skills, expertise,
and contacts gained while working at larger
(downsizing) firms. Because layoff victims
have experienced the trauma of being released
in the past, however, the foundations for their
psychological contracts are likely to have been
shattered. As a result, they may be hesitant to
fully commit to their new employers. Figure 1
illustrates the theoretical effect of downsizing
on victims.
Figure 1 illustrates that downsizing will
change the foundation for future psychologi-
cal contracts that employees will have with fu-
ture employers. The fundamental basis for the
relationship with the future employer will be
impacted by the negative experience of being
a downsizing victim. This change will shape
layoff victims’ expectations of future employ-
ment relationships (between victims and new
Redefining Psychological Contracts With U.S. Work Force • 63
organizations) which will, in turn, affect their
behaviors when they join their new organiza-
tions. An analogy would be the situation of be-
ing “dumped” by a boyfriend or girlfriend. The
resulting effect will go beyond that former re-
lationship to affect future relationships and
behaviors within those future relationships. It
would not be unreasonable to expect the vic-
tim of unrequited love in such a scenario to be
more cautious and less likely to commit to fu-
ture romantic interests. The same can be true
of employment relationships.
I hypothesize that because of their layoff
experiences, victims will lack trust in others and
will be less likely to fully commit and “give
themselves” to their new companies. Unlike in-
dividuals who voluntarily move to a new job or
who have otherwise not experienced layoffs
personally, such as new college graduates en-
tering the job market, victims have different at-
titudes and expectations because of their expe-
rience. Layoff victims constitute a unique
human resource management problem for
future employers. Careful consideration and
planning of the socialization processes for these
employees must take place (Burack & Singh,
1995). Based on this discussion, the following
two formal research propositions are offered:
Proposition 1: Victims of downsizing will be less
likely to trust future employers
than those who have not been
laid off, because their former psy-
chological contracts will have
been breached.
Proposition 2: Victims of downsizing will be
more likely to look out for their
own personal self-interests rather
than for the interests, goals, and
objectives of their future employ-
ers than those who have not been
laid off, because their former psy-
chological contracts will have
been breached.
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64 • HUMAN RESOURCE MANAGEMENT, Spring 1998
Method
To test the propositions above, data from the
1993 General Social Survey (GSS) were ana-
lyzed. The GSS serves as a national resource
for diverse academic interests. It is funded by
the National Science Foundation (NSF) to
gather sociological data from a representative
cross section of the U.S. public. The data con-
tained in the GSS include such things as gen-
eral disposition (satisfaction, happiness, etc.),
racial attitudes, political views, opinions on
gender issues, as well as demographic infor-
mation on each respondent. These data have
to be one of the most widely used data sources
by sociologists to study characteristics of the
U.S. population. The survey is conducted by
interviews with several hundred respondents
annually and is considered the premier na-
tional sociological survey of the United States
(see Burt, 1984).1 The data were downloaded
from the World Wide Web (WWW) site of the
Queens College, City University of New York
(CUNY) Sociology Department.2 The data
come with an extract program which allows
users to pull a subset of the data for analyses
in a variety of statistical software packages.
For my analyses, I used SPSS for Windows,
Release 6.1.
Measures
The GSS asks respondents to provide answers
to relatively specific questions. Unfortunately,
there were no questions specifically geared to
study psychological contracts; therefore, to
test my propositions I analyzed the responses
from two questions.
Trust. To study the effect of downsizing on an
individual’s level of general trust in others, I
used responses for the following GSS ques-
tion: “Generally speaking, would you say that
most people can be trusted or that you can’t be
too careful in dealing with people?” Respon-
dents could answer from can trust, depends,
and cannot trust, on a 3-point scale.3
Self-Interest Versus Organizational Interest. To
study the effect of downsizing on self-
interest versus organizational interest I used
data from a GSS question which asked re-
spondents to state whether they strongly agree,
agree, neither agree nor disagree, disagree, or
strongly disagree with the following statement:
“You have to take care of yourself first, and if
you have any energy left over, then help other
people.” Responses were scored from 1
(strongly agree) to 5 (strongly disagree).
GSS Respondents
The total number of respondents for the 1993
GSS was 1,606; however, the samples used in
this study included only a subset of the re-
spondents because I was only interested in
studying the differences between individuals
who were working full time and those who
were laid off. (The GSS includes homemakers,
part-time workers, students, and retirees.) The
respondents were mostly middle-aged males
who were working. Table I summarizes the
sample sizes and demographics of the respon-
dents for both questions.
Because the total number of GSS ques-
tions is in the hundreds, some questions are
not asked of all respondents, which explains
the difference in sample sizes between the two
questions used in this study.
Statistical Analyses
The statistical analysis chosen for this study
was a 2-tailed, 2-sample t test for equality of
means. The purpose of the analysis was to de-
termine whether the opinions of full-time
workers significantly differ from those that
have been laid off. In my analysis, this would
be indicated by significant differences be-
tween working individuals and layoff victims
in the reported levels of (1) trust in others and
(2) self-interest versus helping others. More
specifically, for each question, the respon-
dents were divided into two groups—those
who were working full time and those who
were laid off—and the mean responses for
these two groups were compared. The impli-
cations of significant differences would be in
showing that the two groups have different
foundations for any potential future psycho-
logical contracts with future employers.
In addition to the primary t test analyses
on trust and self-interest, t tests were also per-
WD6207.061-070 2/11/98 2:53 PM Page 65

Redefining Psychological Contracts With U.S. Work Force • 65

TABLE I Sample Characteristics and Respondent Demographics for GSS Data Analyzed.

Age
Working Laid
Question N Full Time Off Male Female Mean SD

Trust 565 529 (93.6%) 36 (6.4%) 301 (53.3%) 264 (46.7%) 40.33 11.25
Self first 856 804 (93.9%) 52 (6.1%) 475 (55.5%) 381 (44.5%) 40.05 11.20

formed on the age, education, and socioeco-
nomic index (SEI) of respondents. These were
completed in order to test whether the two
comparison groups—full-time workers and
unemployed individuals—were relatively com-
parable in terms of other factors.
Results
Overall, the results of the study indicate sup-
port for both propositions. Table II sum-
marizes the empirical findings of the data
analyses.
Based on the results shown in Table II,
victims of layoffs were significantly (p ⬍ .05)
more likely to indicate that they looked out for
themselves and did not trust people than those
who were working full time. More specifically,
in support of Proposition 1, when respondents
were asked whether they believed people
could be trusted, individuals who were laid off
were significantly more likely to answer that
people could not be trusted (t563 ⫽ ⫺3; p ⬍
.003). As far as reporting whether it was im-
portant to take care of oneself or help others,
those that had been laid off were more likely
to indicate that their own self-interests were
more important than helping others. Again,
the difference in means between the two
groups was significant (t854 ⫽ 2.78; p ⬍ .006).
This finding supports Proposition 2.
The additional t tests on age, education,
and SEI yielded mixed results. The mean age
for both groups was 40 years, and there was no
statistical difference between those who had
been laid off and those who were working full
time (t856 ⫽ 1.69; p ⬎ .05). There were dif-
ferences in education (t858 ⫽ 5.52; p ⬍ .001)
and SEI (t849 ⫽ 4.65; p ⬍ .001). Those who
had been laid off had significantly lower levels
of education and reported lower SEI. The im-
plications of these findings are discussed in
the following section. . . . when
respondents
were asked
Discussion whether they
believed people
could be trusted,
The results of this study illustrate the signifi- individuals who
cant difference in opinions on trust and self- were laid off
interest between layoff victims and full-time were significantly
workers. The statistical method does not pro- more likely to
vide definitive proof that change occurs, but answer that
people could not
results are consistent with the underlying hy-
be trusted.
pothesis that after being laid off, victims’ foun-
dations for future psychological contracts
change. It was reported above that while the
two comparison groups are homogenous in
terms of age, they were not completely com-
parable with respect to SEI and education.

TABLE II Comparison of Sample Means.

Working Full Time Laid Off

Question Mean SD Mean SD

Trust 2.160 0.963 2.639 0.723

Self first 2.616 1.123 2.173 0.964

Note. Difference in means between each column is significant at the p ⬍ .05

level.
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66 • HUMAN RESOURCE MANAGEMENT, Spring 1998
This could be problematic; however, it should
be noted that while the difference in educa-
tion was statistically significant, the actual dif-
ference was marginal. Those individuals who
had been laid off reported having received a
high school education, while the mean level of
education for full-time workers was 2 years of
college. There is no theoretical reason to be-
lieve that 2 years of college education would
have any direct effect on trust and self-inter-
est. It is more likely, and in fact quite probable,
that education has a direct effect on whether
someone is laid off or not (the higher the ed-
ucation the lower the chance of being unem-
ployed) and on SEI (higher education would
result in higher SEI), and thus, education
would have an indirect effect on the variables
of interest in this study.
In any event, there are significant differ-
ences between victims and full-time employ-
Firms that ees, and they are important because as the vic-
hire laid off tims find new jobs, the foundation for their
individuals are psychological contracts will differ from working
likely to find employees. Pfeffer (1994) argues that employ-
that these new
ees, and the way they work, are the crucial dif-
employees are
more concerned ferences between successful and unsuccessful
about their firms. Executives must understand that down-
own personal sizing often destroys long-standing psychologi-
well-being and cal contracts between employers and employ-
less committed to ees. The effect can put new employment
the organization’s
goals. relationships on shaky ground and have a neg-
ative effect on the performance of workers.
Although the model shown in Figure 1 is
supported, by no means does it illustrate all of
the factors that affect future employment re-
lationships and psychological contracts. To
this end, the well-publicized downsizing ef-
forts of some firms can create lasting negative
images of these firms in the minds of employ-
ment candidates. It may be difficult for such
companies to gain the support of new employ-
ees, particularly those that have already gone
through a downsizing. On the other hand, in-
dividual layoff victims suffer differential levels
of trauma. For temporary or seasonal workers
the trauma of being laid off will probably pale
in comparison to the 20-year middle manager
who is told s/he is no longer needed. Tenure
and equity variables (fair treatment, fair sev-
erance compensation, etc.) could be included
as moderators in Figure 1, but to reiterate,
Figure 1 is not meant to be an exhaustive mod-
el based on past theory and research. It is only
meant to illustrate a significant factor that has
largely been overlooked by practitioners and
gone understudied by academics, namely the
effects of breached psychological contracts
following a layoff.
Unfortunately, the GSS did not specifical-
ly ask about employment relationships and
psychological contracts; however, this study
provides support for the proposition that
downsizing and layoffs do change victims’ atti-
tudes on the basis for psychological contracts
between employers and employees. The pri-
mary limitation of the study is that the data
used in the statistical analyses are cross sec-
tional. With the data set used for the analysis,
it is impossible to determine causality. To elab-
orate, it may be the case that individuals who
are selfish and less trusting of others are more
likely to be laid off. Certainly further research
efforts, particularly studies employing longitu-
dinal designs, are needed.
Firms that hire laid off individuals are like-
ly to find that these new employees are more
concerned about their own personal well-be-
ing and less committed to the organization’s
goals. This fact should not be taken as a rec-
ommendation not to hire a layoff victim; aside
from being discriminatory such a policy would
turn away individuals with valuable work ex-
perience. The bottom line is that these em-
ployees pose a growing managerial challenge
because the numbers of layoff victims contin-
ue to swell and almost every industry is being
affected. To address this growing issue, ac-
tions to foster management credibility and
trust with employees must be undertaken. If
credibility and trust issues are ignored, firms
may suffer negative outcomes such as lagging
quality, productivity, creativity, and increasing
absenteeism and turnover. Managing and
maintaining psychological contracts of work-
ers who have been victims of downsizing pre-
sent a clear strategic human resource man-
agement issue.
The Role of Strategic Human
Resource Management
There is little doubt that downsizing as a cor-
porate strategy to control costs and improve
productivity is here to stay. As a result, the
numbers of individuals in the work force who
WD6207.061-070 2/11/98 2:53 PM Page 67
will have experienced a layoff at some point in
their careers will continue to grow. Prior to
hiring new workers who have been laid off,
firms must carefully evaluate their socializa-
tion processes. Strategic human resource
management planning must be conducted to
anticipate and manage psychological reac-
tions of newly hired employees who were lay-
off victims because the responsibilities and
expectations of the new employment relation-
ship will need to be carefully defined. Strate-
gic HRM planning can help corporations re-
capture employee loyalty and commitment
through the development of new types of psy-
chological contracts.
New psychological contracts must replace
the traditional loyalty and hard work
for job security expectation. An entire article
could be dedicated to the form and substance
of new psychological contracts; however, this
article provides only a brief discussion. New
psychological contracts require that firms en-
sure employability rather than employment in
exchange for dedicated work effort. Clearly, in
today’s highly competitive business world,
most firms cannot guarantee lifetime job se-
curity. Workers and firms can both benefit
when employees remain highly skilled. By pro-
viding periodic training and education of new
skills, firms benefit from having fully quali-
fied, up-to-date employees; and individuals
can remain competitive in the work force even
if they are laid off. If employees know that they
will remain marketable, they will be more like-
ly to trust management’s decisions knowing
that even if the company must make job cuts
they will be able to find jobs because of their
learned skills. The keys to successful develop-
ment of mutually beneficial psychological
contracts are open communications and con-
tinual training.
Employees expect employer behaviors
that are ethical and trustful, and the formation
of the psychological contract can begin even
before an employee joins a firm. It is up to the
organization to clearly and honestly commu-
nicate the responsibilities and expectations of
employees, as well as what will be given in ex-
change. Wanous (1973, 1983) has argued that
a realistic preview of job demands before
entry should increase commitment to the or-
ganization. Feldman (1976) contends that
during the pre-entry stage, realism and fit be-
Redefining Psychological Contracts With U.S. Work Force • 67
tween the individual and group are important
factors affecting subsequent socialization
processes. Realism is the extent to which an
individual has a clear understanding of what
the organization is like. Higher commitment
at entry, which can be fostered by matching
initial expectations, helps to set the stage for
higher productivity and reduced turnover
(Lee, Ashford, Walsh, & Mowday, 1992). It is
up to organizational HR planners to ensure
proper screening methods and open commun-
ications with candidates prior to hiring. Clear
and honest discussion of mutual obligations
(both employer’s and employee’s) will facili-
tate understanding of expectations, corpor-
ate culture, career development, and finan-
cial responsibilities related to derived
benefits.
After entry, the organization has a respon-
sibility to provide employees with timely and
adequate information, including useful per-
formance and quality data, major corporate
business issues, and strategies that affect em-
ployee welfare. Trust in management is built
on acts of good faith and consistency in lead-
ership and policy actions, and helps maximize The organization’s
employee effort. Employees need to feel that culture and
the company is acting in their best interests. management
By articulating the corporate vision, and main- strategies must
taining behavior and actions consistent with clearly and
strongly signal
that vision, firms can further develop with em-
consistency and
ployees new psychological contracts built on support for
mature employment relationships where em- employees, or it
ployees understand and trust managements’ will prove futile
business judgments (Burack, 1993; Morin, to try to persuade
1990; Peters & Waterman, 1982). employees to
contribute their
Finally, management credibility is a nec- ideas or to work
essary condition for strong new psychologi- harder in the
cal contracts. The organization’s culture and dynamic and
management strategies must clearly and changing
strongly signal consistency and support for corporate
atmosphere.
employees, or it will prove futile to try to per-
suade employees to contribute their ideas or to
work harder in the dynamic and changing cor-
porate atmosphere. It falls upon top manage-
ment to allocate the time and resources need-
ed for these critical HR issues.
Conclusion
Companies and employees do not work with-
in a vacuum, and every action has a corre-
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68 • HUMAN RESOURCE MANAGEMENT, Spring 1998

sponding reaction. Downsizing is undertaken
for strategic, economic, and technological rea-
sons. Layoffs are sometimes necessary for
survival, but now even healthy firms are an-
nouncing layoffs. As a result, the characteris-
tics and makeup of the work force are chang-
ing, and corporate executives must carefully
consider the full social and psychological im-
pacts. The breaching of psychological con-
tracts can lead to a lack of trust and confi-
dence in management, from both existing
employees and new employees who have been
victims of downsizing in the past. This may re-
sult in turnover, increased stress, uncertainty,
and feelings of inequity (among other things).
Left unaddressed, this can, and often does,
lead to dysfunctional consequences which can
have severe effects on the future of organiza-
tions.
Popular business publications such as For-
tune, Business Week, and the Wall Street Jour-
nal regularly publish stories about various as-
pects of announced and enacted downsizings,
yet the full psychological effects of layoffs
have received only limited attention in acade-
mic journals. Relatively speaking, there con-
tinues to be very little empirical work in this
area. This is disheartening, considering the
emergence of downsizing as a corporate strat-
egy. Further study, particularly longitudinal
study of the effects of layoffs on victims and
survivors, must be conducted to assess the full
impact of downsizing.

Robert Singh is a fourth year doctoral student in the Managerial Studies Department at
the University of Illinois at Chicago. His research interests include survivor reaction to
downsizing, social networks of entrepreneurs, and business growth dynamics. He has pub-
lished and presented several articles in the areas of human resources and entrepreneur-
ship.

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ENDNOTES
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tract.html.
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3. The responses for the GSS question dealing with “Trust” were
originally scored as
“1” if the respondent answered can trust
“2” if the respondent answered cannot trust
“3” if the respondent answered depends
In my data analyses, I recoded cannot trust as a “3” and depends
as a “2” to create a continuous scale.