Estimating the Local Effects of Defense Cuts on Small Business, 1992-1999



Small Business




United States Small Business Administration
Office of Advocacy
RS 148


Estimating the Local Effects of Defense Cuts on Small Business, 1992-1999


by Nestor Terleckyj
1994. 206p. NPA Data Services, Inc. 1424 16th St., N.W., Washington, DC 20036 under contract no. SBA-94-0437



Substantial reductions in U.S. defense spending are already legislated or programmed to continue until 1999. These reductions will cut the number of military personnel and civilian government defense employees, as well as reduce jobs in private defense contractors and their suppliers and subcontractors.

The Office of Advocacy of the U.S. Small Business Administration is charged to examine changes in public policy that will affect small business. Changes in the pattern of defense spending can impact heavily on small business. Some small firms will lose contracts or defense-related sales to the government or to prime defense contractors, others will lose business servicing the government.

The objective of this research was to estimate the effects of reductions in small business employment for the period 1992 to 1999 that result from cuts in defense expenditures for payrolls and procurement. These effects are concentrated geographically because most defense spending is heavily concentrated in comparatively few local economies.

The study also provides a methodology for making regular updates of the estimates in the future.

Scope and Methodology

Direct data on defense-dependent small business employment and its location are not available. The levels and projected changes in small business employment used in this study were derived from state and industry information for defense purchases and contract awards.

This study draws on previous work by NPA Data Services, Inc., published in Cuts in Defense Jobs in U.S. Counties, Metropolitan Areas and States, 1991-2001. The researchers also used state-by-industry expenditure projections from 1991 to 1997 from the U.S. Department of Defense's Regional Defense Economic Impact Modelling Systems (RDEIMS); data bases and reports of the U.S. Small Business Administration; and state and two-digit industry Standard Industrial Classification (SIC) code employment data from the U.S. Department of Commerce, Bureau of Economic Analysis, Regional Economic Information System (REIS). In addition, the study uses data and information from other sources, notably, the analyses conducted at the Defense Budget Project and the U.S. Department of Labor, and an analysis of the potential effect of base closing on local economies performed by the U.S. Department of Defense.

The estimates of future defense reductions are based on an analysis of the fiscal year 1995 National Defense Budget and of the 1993 recommendations of the Base Closing and Realignment Commission.

The analytical data sets contain estimated projected job losses by small business resulting from the defense cuts programmed for the 1990s. These are given by state for all states and for the Metropolitan Statistical Areas (MSAs), as well as for non-metropolitan counties with significant projected job losses of defense jobs by small business. The complete data base is available on diskettes.


  • Budget reductions in defense spending for compensation and purchases, combined with the shrinking private defense industry, are projected to result in a reduction of 1.8 million government and private defense jobs þ from 5.6 million jobs in 1992 to 3.8 million jobs in 1999.
  • Small firms will absorb about half of these budget cuts. Reductions in defense spending will affect small business in two ways. First, they will directly reduce government and large defense-contractor firm purchases from the small business contractor, subcontractor and supplier firms in the defense industry. Second, job losses by military and civilian defense workers in government and workers in the private defense industry will result in an indirect reduction of revenues for small businesses. These indirect reductions are larger than the direct effects and involve several rounds of a multiplier effect.
  • The short-term effects of reduced defense spending will be concentrated in the industries and in the states and localities that have received large amounts of defense business in the past. The small businesses that are located in these areas will be most severely affected. The states that will have the largest total dollar impact are California, Texas, Virginia, New York and Florida. The states that will experience the largest impact relative to the state economy are Alaska, Hawaii, Virginia, California and Mississippi.

Ordering Information

The complete report is available from:

National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487-4650
(703) 487-4639 (TDD)

Order Number: PB95-100285

Cost: A10; A03 Microf.
*Last Modified 6-11-01