Without using the manufacturing capacity of allied nations, the United States probably cannot fill its own national security needs. One reason, according to a study by Bloomberg Government, is the apparent shortage of skilled manufacturing labor in the U.S. For more, the Federal Drive with Tom Temin spoke with Bloomberg Senior Data Analyst Paul Murphy.

Interview transcript:

Tom Temin And what were you looking at here? Is this having to do with replenishment of supplies and things because of what we’ve been shipping to Ukraine? Or is it just future aircraft, shipped, plane gun ordnance, etc. needs?

Paul Murphy Well, what’s prompted our latest research is surging demand in government spending, particularly defense spending was at record levels last year. But I focused, most recently, on the declining number of vendors in the industrial base. And this feeds into the whole broader discussion about hiring and labor shortages and so forth. But just to rehash, we were ahead of the hearing. We put out some numbers that showed that the Pentagon has lost one of five of their small business suppliers since fiscal 2018, it’s down to about 12,600. And it’s lost one of five of their large business contractors as well, about 32,681. So what’s causing this departure from the federal industrial base? And I think there are a number of macro and micro causes to this. And I was looking at it and came up with, oh gosh, almost a dozen reasons why the U.S. is experiencing trouble with hiring in the federal marketplace.

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Tom Temin All right. And well, what are the top three? Let’s say, let’s go there.

Paul Murphy Thanks for asking. Virtually all of the major contractors are citing COVID-19 as one of the big problems in the last couple of years, particularly last year. Companies like Lockheed, Boeing, Raytheon, they’re all citing illnesses, restrictions, lockdowns, return to work requirements that have led to hiring difficulties, which in turn have led to disruptions in delivery. And their supplier base has been experiencing a lot of the same disruptions. So there’s been procurement slowdowns and this is contributing, more broadly, throughout the economy to a broader economic slowdown, which in general is slowing hiring. So there’s one. So the COVID restrictions, are going to let up soon. We think the administration is declaring an end to the health emergency in may. Port bottlenecks and shipping supply chains appear to be resolving. But there are a number of other issues. For instance, trade restrictions with China and international hostilities are leading to gaps in certain industries that are slowing down hiring. There’s a big issue with reduced immigrant labor. There’s a study out from the University of California, Davis. The U.S. had 2 million fewer working age immigrants at the end of 2021, than it would have had if pre-pandemic immigration trends had continued. The researchers say that nearly half of the missing 2 million immigrant workers would have been college educated. And traditionally, these are workers who perform at critical industries, like semiconductors and biotech. These industries have depended on immigrants, scientists, engineers and entrepreneurs, and a lot of highly educated, skilled workers coming from these other countries. And contributing to that, are delays in work visas, closed borders, all of its contributing to a shortage of labor. Particularly, in industries that are critical to defense and the federal government.

Tom Temin Yes, because I think people, sometimes, miss the fact that if you are building an airplane, it’s filled with tens of thousands of components and parts. And those, many of them are made by small businesses, gyroscopes, instruments, connectors, all these little things that go into the hull that might be made by a big prime. That’s all they make, and they buy everything else that goes in there. And could it be just the small business and the procurement regulations and the complexity and the growing complexity of it? Could that be a factor? Limiting companies simply wanting to be in the defense industrial base?

Paul Murphy Oh, sure. I mean, of course, when you limit the number of suppliers, strictly suppliers from China, you have to be able to backfill parts that were order from these companies. And I think we’re in the process now, with the Inflation Reduction Act of investing in the semiconductor industry and some of these other high tech industries, to build domestic capacity and rebuild the infrastructure and all the things that feed into federal industrial base. But something else we’ve documented, and I think maybe talked about in the past, is the consolidation of government contracts is leading to this reduction of small businesses in the marketplace, the federal marketplace. And it’s consolidating spending into larger vendors. And this in turn, is giving them a lot more leverage, in terms of hiring and making it more difficult for small businesses to hire. And so when you combine this with coming off of the COVID restrictions and the supply chain disruptions. But everybody’s experiencing inflation. Another factor that, particularly, small businesses are having to cope with is inflation. When salaries are going up, there’s a lot more attrition, there’s a lot more job shopping, there’s higher costs for the vendors, particularly on fixed price contracts. So it makes it very difficult to hire and perform profitably.

Tom Temin We’re speaking with Paul Murphy. He’s senior data analyst at Bloomberg Government and long-time observer of this market, I should also add. And with respect to hiring and small business, you have really two places where there might be shortages. And you mentioned the COVID restrictions. A lot of people that are in the so-called office jobs or white collar jobs, and there’s a lot of that goes along with government contracting to do the cost accounting and contract control and all of the reporting that has to be done. Those people may want to just continue to telework and their companies may want them back. And then if there’s not enough people to do the manufacturing, that’s a different problem, because that has to be done on site by nature of the work. And yet, the people with those skills aren’t out there. So is there a double pincher going on there in the small business space?

Paul Murphy Oh, absolutely. And I think the government can address this by actively taking on policies that try and encourage more small businesses to enter the federal marketplace. A lot of these innovative contract methods, these non-farm contracting methods to bring small businesses in, need to be multiplied again and again. I think, particularly, with the small business sector, because there are companies out there capable of doing this work. But, they need the incentive to be able to do it. They need to see avenues. And when you’re increasing the cyber certifications, and Cybersecuirty Maturity Model Certification (CMMC)] and FEDRAMP and making the barriers to entry to the market that much higher. I think there needs to be attention paid to all of these issues. The supply chain, the lowering the barriers to entry, diversifying the contract base and loosening, perhaps, some of the restrictions on awarding visas so that particularly small businesses and mid-sized firms can have access to the workers they need to do some of this high tech work.

Tom Temin And when you point to the 20% of companies, both in the large company, large prime, and also the small business sector, it’s still 20% of all the companies in the [Defense Industrial Base (DIB)]. Do you know the break down between manufacturing companies and services companies? Are more leaving in manufacturing versus services or what?

Paul Murphy I’ll be happy to get back to you on that in the next interview.

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Tom Temin All right. We don’t know.

Paul Murphy It’s tight in both the services and manufacturing. The numbers that I cited are consolidated numbers. But if you break it down by manufacturing, I think you’d see that there are particular limitations there as well.

Tom Temin Sure. With in the age of six digit naics codes, I guess it makes it harder to do a lot of that. You need some more places in your in your analytical. So is there a way out? Is there anything that the department can do? Or that all of the buying departments can do to encourage business formation? Or at least if not formation, migration to the federal market?

Paul Murphy Well, I think we’re going to see some natural improvement as a result of the reduced impacts of COVID. Again, the administration’s lifting of restrictions on the emergency or imposed by the emergency. So I think we’re starting to see some resolution of the supply chain and the shipment backlogs. Remember all the stories that are out about the backlog at the Port of Los Angeles and and inability to get goods out of the ports. I think that’s resolving. Now something it’s interesting, we didn’t touch on yet, but the companies in their case are citing the inability to train workers in security compliance and to get enough workers approved for high security jobs. And so I think there’s some company level work that needs to be done. I think, again, looking back out at the macro level, the need to control inflation, I think that will have an impact on job shopping and wage inflation that will make small mid-tier firms that much more competitive. Because they have a record, a history of hiring more people per dollar of in large firms. So I think a focus on the more intense job creators, in the federal marketplace, any policies that can diversify the contract base and make things easier for small companies to find the workers they need and pay them competitive wages. So I think a lot of these things need to be done in concert. I think, when you talk about the Buy America, that tends to rub against some of these initiatives. And it’s not just me advocating, you have the head of the National Defense Industrial Association. You have senior people last week at the the Naval conference, 2023 Conference,  out in West Coast. They were talking about the need to diversify supplier base in order to get the work done. And so all of these policies need to work together to reinforce a more robust labor market in the federal marketplace.

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