What are psychological contracts and why do they matter?
Psychological contracts (compared to the formal employment contracts) capture the unwritten, subjective beliefs of the employee about the mutual obligations in the employment relationship—what the employer owes you and what you owe to the employer.
Beliefs about the obligations of the employer can include providing career development, training, some flexibility, fair pay, helpful feedback on job performance, etc. Obligations of the employee can include adequate job performance, loyalty, helping solve problems at work, etc.
The power of a psychological contract is most visible when it is perceived as having been breached (i.e., obligations are unmet or promises broken): The employment relationship sours and the employee becomes demotivated, even hurt and angry and can leave the organisation. It can force an older worker to retire early. On the other hand, when this relationship thrives, the older worker is engaged and all stakeholders (the employee, the employer and society at large) benefit from a productive member of the workforce.