L.A. Defense Job Losses Twice the U.S. Rate : Study Cites Pentagon’s New Emphasis on Costs

Los Angeles County, the nation’s largest defense industrial center, lost aerospace jobs at nearly twice the U.S. rate between 1987 and 1991, in large part because a new Pentagon emphasis on price competition put local contractors at a disadvantage, according to a RAND Corp. study.

Although some experts have suspected for years that local defense firms were losing contracts because their cost of business was too high to compete effectively, the RAND study marks the first time the losses and their suspected causes have been documented in any detail.

While aerospace employment dropped 10.7% in the overall U.S. economy from 1987 to 1991, it plunged 20.3% in Los Angeles County, the study found. Since Los Angeles is three times more dependent on the aerospace industry for jobs than is the rest of the nation, the precipitous fall has created an economic impact six times greater than the rest of the nation.

The aerospace industry suffered broadly throughout California, but the troubled Los Angeles sector of the business made the picture much worse for the state. The most recent data also indicates that the trend shows no sign of turning around.

“Whatever problems are affecting California aerospace, they are likely to get worse in 1993,” said James Dertouzos, one of the authors of the RAND report. “There is not a lot of good news in this for the California economy.”

The prospect of an unhealthy California aerospace industry could even pose serious problems for the Pentagon, undermining its defense industrial base.

Although some aerospace contractors have fled the state to lower their costs, many others must remain because of the expense of moving their specialized facilities and also the specialized pool of workers here.

California began the 1980s able to create aerospace jobs significantly faster than the rest of the nation. But by 1991, it was losing jobs at a rate 2.2 percentage points above the rest of the nation, even after adjusting the statistics for changes in the mix of defense contracts. Most of California’s disadvantage stemmed from Los Angeles County.

The study did not provide any indication of how large a cost disadvantage Los Angeles aerospace contractors are at, relative to the rest of the nation, or whether the disadvantage could be remedied through state or local initiatives.

In addition, nearly 20% of the state’s 100,000 job losses in aerospace were accounted for by McDonnell Douglas, mainly because of losses in its commercial aircraft business, which has fared poorly in sales competitions against the much larger product line of Boeing and Airbus Industrie.

Dertouzos said he has little doubt, however, that the Pentagon emphasis on cost competition, beginning in the mid-1980s, accounts for a great deal of Los Angeles firms’ disadvantage in keeping jobs.

Historically, cost was not the Pentagon’s most important criteria in awarding major weapons contracts, and, once a firm was established in a product, it was seldom forced to compete for subsequent contracts. But that began to change, spurred by rising weapons costs and the new Competition in Contracting Act, passed by Congress.

Dertouzos conducted a computer analysis of 170,000 contract actions between 1987 and 1991 and found that California firms were at a severe disadvantage in competitions for fixed-price contracts. While California firms received about 22% of overall Pentagon awards, they had a probability of getting 15.5% of fixed-price contracts awarded competitively. Since these types of contracts are on the rise, the local contractors were increasingly losing business.

Notably, the California disadvantage in job losses occurred almost entirely at firms with more than 1,000 employees. California’s small firms retained an advantage against rivals in other states.

The finding suggests that federal subsidies to major defense contractors may not be the most effective public policy to help the region adjust to lower defense spending.

Rather than provide big industrial subsidies to weapons firms, Dertouzos said, the federal government should consider providing tax incentives that allow a “market solution” to the defense conversion problem.

“Over the longer term, steady erosion of the California advantage in attracting aerospace business mirrors secular declines in the region’s manufacturing strength, particularly in Los Angeles,” the study says.

The RAND study, which will be publicly released in several weeks, also shows that California’s ability to lead the nation in creating non-aerospace industrial jobs deteriorated throughout the 1980s.

By the period 1987 through 1991, the state still outperformed the U.S. economy by 1.8% in industrial job formation, but that was down substantially from what had been a commanding advantage a few years earlier.

The state’s problem, however, resulted mostly from a deterioration in Los Angeles County, the study found. If that county is removed from the data, California still had a 4.4% advantage relative to the rest of the nation.

“The California problem is really a Los Angeles problem,” Dertouzos said.