Study says major employment gains impact huge supply chains of U.S.-based firms
The U.S. Department of Defense is conducting a competition to develop and produce a new in-flight refueling tanker aircraft currently called the KC-X tanker. The two competitors for the contract are the Boeing Company and Airbus a subsidiary of the European Aeronautic Defense & Space Company (EADS) in partnership with the Northrop-Grumman Corporation.
This report examines the employment effects of sourcing this major U.S. military procurement program with a U.S.-based company (Boeing) compared to a foreign-based firm (Airbus) teamed with a U.S. company (Northrop-Grumman) that would design and manufacture most of its tanker aircraft in Europe. Using publicly available data this report concludes:
- Based on the new direct investments in property plant and equipment entailed in carrying out this contact Boeing would create 10 times as many new U.S. jobs as Airbus/Northrop-Grumman.
- If Boeing develops and produces the tanker it should lead to the creation of an estimated 62605 to 70706 new U.S. jobs over the life of the contract.
- By contrast if Airbus/Northrop-Grumman develop and produce the tanker it should lead to the creation of an estimated 5113 to 7080 new U.S. jobs over the life of the contract.
- These job projections are for Boeing and Airbus/Northrop Grumman and do not include suppliers or other indirect jobs attributable to this program over the life of the contract.
Both companies propose to meet the Pentagons requirements by developing certain new refueling technologies and applying them to aircraft which each already produces. Based on the proposals submitted for the last competition as well as economic analysis and historical experience the vast majority of the production of the new refueling tanker will occur at the existing facilities and operating assets of the winning competitor.
In this context the different U.S. employment effects for the two companies arising from the KC-X tanker contract reflect the fact that the U.S.-based Boeing maintains 96 percent of its operating assets and facilities in the United States while the foreign-based EADS and Airbus maintain 96 percent of their operating assets and facilities in Europe.
The conclusions of this analysis are not based on the jobs estimates and projections provided by the two companies. Rather they are based on long-term public data tracking the relationship between increases in U.S. investments and increases in U.S. job creation when those investments are undertaken by U.S.-based aircraft manufacturers compared to a foreign based multinational with a small U.S subsidiary operation.
Whether Boeing or Airbus/Northrop-Grumman ultimately produces the aircraft much of the $35 billion contract will go for goods and services provided by each companys worldwide network of suppliers and vendors.
While these purchases will indirectly create many jobs there are no verifiable data regarding where these vendors and suppliers are located in the United States or abroad nor can we predict how much work would be carried out at specific locations or how the companies supply chains will change over the lifetime of this contract.
Therefore this analysis focuses on the new fixed investments in property plant and equipment (PPE) which these companies would themselves undertake to build the new tanker and the new U.S. jobs over the life of the contract associated directly with those investments.
Based on the historical relationships between new PPE investments and job creation these data show that the U.S.-based Boeing would produce 10 times as many new U.S. jobs as the Airbus/Northrop-Grumman partnership. These estimates are affected only modestly if we assume that under the Airbus/Northrop-Grumman partnership Airbus would be responsible for three-fourths of the new investment and Northrop-Grumman would carry out the remaining one-fourth.
The company that is awarded the KC-X tanker contract will also generate other important economic effects. While much of the new tankers basic structure will come from existing aircraft developing the KC-X tankers unique capabilities will require significant research and development.
Extensive economic research has found that such R&D for new aircraft and other military assets often produces large spillover" effects where a new technology piece of equipment or manufacturing technique or process can be applied in other uses and industries. These spillovers can generate additional economic benefits through higher productivity enhanced efficiency and contributions to subsequent innovations.
Productivity efficiency and innovation are critical factors in sustaining international competitiveness and preserving a countrys domestic industrial base with significant economic and national security implications.
Economic research also has established that many of these spillover effects occur in geographically-based clusters" transmitted through the working relationships that link large firms such as Boeing or Airbus with hundreds of smaller producers and suppliers in the same geographic area. These smaller producers and suppliers may also provide products and services to companies in other industries.
Through these supply chains innovations in aircraft manufacturing can help generate economic benefits for a range of local and regional firms across many industries.
The U.S. aircraft and aerospace industries are highly concentrated in California and Washington State while their European counterparts are highly concentrated in France and Germany. The decision in the KC-X tanker competition therefore will determine whether such critical spillover effects occur primarily in the United States or in Europe.
Considerations of national security and cost along with technical issues will naturally play central roles in the KC-X tanker contract award decision. Policymakers however should also be fully informed about the economic implications of that decision as documented here.
We find that awarding the contract to U.S.-based Boeing would generate approximately 63626 more U.S. jobs over the life of the contract than would awarding the contract to Airbus and Northrop Grumman. We further find that the spillover benefits from the development of the new tanker would be concentrated in the United States if the U.S.-based Boeing does the development but in Europe if the European-based Airbus does it.
These differences could have significant economic impact as well as longer term implications for the U.S. industrial base.
