It slows the timer down. For example, in timer mode, timer1 is incremented with every clock cycle if the prescaler is 1:1. But when the prescaler is 1:8, it is incremented with each 8th cycle.
The postscaler on the other hand, which can be used with timer2, sets the number of timer overflows before an interrupt can occur. 1:1 postscaler means every timer overflow triggers the timer2 interrupt where 1:2 means every 2nd overflow triggers the timer2 interrupt.