if I work as an engineer for a defense contractor, and the government cancels the contract, and I lose my job as a result - it must mean that I in-effect worked for the government. The government contract paid my salary, in its absence I am unemployed, so they must have effectively been my employer. Forget the semantics of it.
Wrong, you work for the company that hired you. They pay your salary from their profit margin (some or all of it may come from the government). If you loose the contract the company may or may not be able to relocate you to another (this is just like private industry here). The fact that the government is your client makes no difference on the fact that you are part of the free market. The government is not your employer, it is your client. If you work for a company that has one client and one contract then you effectively work for the client, consequently the most successful defense contractors do not have one client and one contract. They also don't turn around and dump people when contracts are lost (as a rule) usually they have enough work to retool. These principles work the same way for any corporation that deals with private industry. You'd be hard pressed to find a large (i.e. Fortune 100) company that doesn't have some percentage of its profit coming from the government though.
Cheers,
CSG