Major cuts in defence expenditure necessarily reduce employment in manufacturing industries where, world‐wide, some 9 per cent of jobs are sustained by defence spending. Virtually all alternative patterns of final demand would switch the structure of employment towards the service sector and consumer goods.While the effects overall on employment would be positive, and should also benefit the developing countries, past shake‐outs in manufacturing in the OECD countries have involved social loss in terms of unemployment, involuntary retirement and reduced wages. Such costs will be minimised if job search and retraining are assisted and new investment is encouraged to substitute for weak geographical mobility.East and Central Europe have little experience of such active labour market policies although they need to be developed speedily. Trade Union action can be constructive in pressing for improved information flows and consultation at the plant level and for national legislation to provide a better framework for such action.