Introducing the North American Industry Classification System

Technical Note

Introducing the North on communications resellers, database rental stores, and plastic bottle manufac- American Industr y publishers, Internet service providers, or turers, for example, were introduced for electronic publishers. NAICS identifies the first time in 1987. Classif ica tion System these and other emerging economic ac- The 1987 revision left 75 percent of tivities that do not easily fit into the cur- the industries unchanged, however, and John B. Murphy rent SIC structure. the basic structure of the system was left Although converting to NAICS will largely intact. Also, while the SIC system In 1997, the Office of Management and provide many advantages, the transition adequately reflects the manufacturing Budget (OMB) announced the adoption to the new system also will create some sector of the economy, it provides insuf- of a new standardized system for classi- difficulties for data collectors and users. ficient detail for the services sector. fying industries—the North American In- Breaks will occur, for example, in many Newly developed industries in informa- 1 dustry Classification System (NAICS). time series that are based on the SIC sys- tion services, health care provision, and NAICS will replace the Standard Indus- tem. This report provides a brief over- even high-tech manufacturing cannot be trial Classification (SIC) system and thus view of NAICS—covering its background, adequately studied under the current SIC represents one of the most profound development, principles, structure, and system because they are not separately changes for government statistical pro- implementation—and also discusses identified at the most basic level of ag- 2 grams since the 1930s. Although the some of the issues that data collectors and gregation, the industry level. current system has been revised and up- users must face as more and more gov- Another shortcoming of the U.S. SIC dated periodically, the basic structure has ernment and private statistical programs system was that it was not strictly com- remained intact since its inception. The convert to the new system. parable with its counterparts in Canada NAICS revision is much broader—many and Mexico. To address this problem, more industries are identified under the Background representatives from all three Nations new system, and they are organized on worked cooperatively to develop NAICS. the basis of their production activities Over the course of its economic history, The new system makes it possible to cre- (supply) alone, as opposed to the mix- the United States has gone from a largely ate comparable economic statistics from ture of supply and demand characteris- agrarian economy in its earliest period, the three NAFTA trading partners. tics used to classify industries under the to one based more on manufacturing fol- SIC. NAICS also seeks to standardize the lowing the Industrial Revolution, to the NAICS development classification systems of the three part- current, more services-oriented economy ners to the North American Free Trade of the late 20th century. To better accom- The development of NAICS began at the Agreement (NAFTA), the United States, modate the many new manufacturing in- International Conference on the Classi- Canada, and Mexico. dustries and other changes that had oc- fication of Economic Activities held in Industrial classification systems pro- curred in the early 1900s, the Standard Williamsburg, Virginia, in 1991. In 1992, vide the structure for collecting and ag- Industrial Classification (SIC) system was OMB established the Economic Classifi- gregating economic data, as well as for developed in the 1930s. The SIC system cation Policy Committee (ECPC)— analyzing, presenting, and disseminating provided a consistent framework for as- chaired by the Bureau of Economic such data. Economic changes that have signing descriptive industry codes to each Analysis, and with representatives from taken place in the last several decades— establishment, as well as for the subse- the Bureau of Labor Statistics and the Bu- such as the movement toward a more ser- quent collection, tabulation, and analy- reau of the Census—to study alternate vices-oriented economy, the increased sis of economic statistics by government economic concepts (supply versus de- use of computers and other new technol- agencies and private research firms. mand) by which to categorize industries ogy, and globalization—have precipi- Since its inception, the SIC system has and to recommend changes to the SIC tated the need for a new system of indus- been revised and updated periodically, system. In 1994, the ECPC chartered six trial classification. Twenty years ago, for about every 10 or 15 years. The most re- subject-matter subcommittees and a Co- example, there was no need for statistics cent revision took place in 1987, when a ordinating Committee to propose the number of new high technology indus- structure of NAICS. The subject-matter tries were identified, especially within subcommittees were charged with re- John Murphy is a supervisory economist in the Division of Occupational and Administrative Sta- computer-related services. Categories for viewing current industries and evaluat- tistics, Bureau of Labor Statistics. computer and software stores, video tape ing proposals for new NAICS industries

Monthly Labor Review July 1998 43 Technical Note

similar in the eyes of customers or users Exhibit 1. NAICS structure and SIC structure compared of the product or service. Others, however, were based more on supply group- NAICS SIC ings. NAICS is the first industrial classifi- Sector (two-digit) Division (letter) cation system used in the United States Subsector (three-digit) Major group (two-digit) to employ a unified economic concept Industry group (four-digit) Industry group (three-digit) to define industries. Under the new sys- NAICS international industry (five-digit) Industry (four-digit) tem, industries are classified on the ba- National industry (six-digit) sis of their production or supply func- tion—establishments using similar raw NAICS sectors SIC divisions material inputs, capital equipment, and 11 Agriculture, forestry, fishing A. Agriculture, forestry, and fishing labor are classified in the same industry. and hunting B. Mining This approach creates more homoge- 21 Mining C. Construction neous categories that are better suited for 22 Utilities D. Manufacturing economic analysis. 23 Construction E. Transportation, communications, Four primary concepts were used in 31-33 Manufacturing electric, gas, and sanitary services the development of NAICS. First, a pro- 42 Wholesale trade F. Wholesale trade duction-oriented conceptual framework 44-45 Retail trade G. Retail trade was used—as described earlier, estab- 48-49 Transportation and warehousing H. Finance, insurance, and real estate lishments engaged in similar production 51 Information I. Services activities are classified together. Second, 52 Finance and insurance J. Public administration new categories in NAICS focus on emerg- 53 Real estate and rental and leasing K. Nonclassifiable establishments ing industries, services in general, and 54 Professional, scientific and industries that produce advanced tech- technical services nology. Third, as much as possible, con- 55 Management of companies and tinuity with the former system was main- enterprises tained to avoid breaks in time series. 56 Administrative and support, waste management and remediation However, because of differences in the services classification systems formerly used by 61 Educational services the United States, Canada, and Mexico, 62 Health care and social assistance many changes were needed to make them 71 Arts, entertainment, and recreation comparable. Thus, some breaks in time 72 Accommodations and food services series were unavoidable. Finally, the de- 81 Other services (except public velopers of NAICS strove for compatibil- administration) ity with the two-digit level of the Inter- 92 Public administration national Standard Industrial Classifica- 99 Unclassified establishments tion of All Economic Activities.4

Structur e of NAICS on the basis of production or supply- committees negotiated the structure of based activities, as opposed to the former NAICS with their counterparts in Canada While NAICS uses a hierarchical structure system that used a mixture of production and Mexico during 1995 and 1996. The much like the existing SIC, there are a and marketing (demand-based) activities adoption of the new classification sys- number of important structural differ- as criteria for categorization. tem was announced by OMB in a notice ences. For example, NAICS uses a six- To notify the public and evaluate their published in the Federal Register of digit classification code which allows response, the proposed changes were April 9, 1997.3 greater flexibility in the coding structure. published in a series of Federal Register The SIC system was limited to only four notices from 1994 through 1996. In these Principles of NAICS digits. Another important difference is notices, the ECPC solicited the help and that NAICS uses the first two digits of the advice of U.S. Government agencies, The former SIC system used a mixture of six-digit code to designate the highest trade associations, data producers and concepts to categorize economic activ- level of aggregation, with 21 such two- users, researchers, academics, and the ity. Some categories were based on de- digit industry sectors under the new sys- general public. The subject-matter sub- mand groupings, activities that were tem. Under the SIC system, by contrast,

44 Monthly Labor Review July 1998 there were only 11 divisions, designated Exhibit 2. Complete NAICS structure for information sector by letters of the alphabet. (A tabular comparison of terminology and a full list of NAICS code Industry NAICS sectors and SIC divisions are shown 51 Information in exhibit 1.) 511 Publishing industries 5111 Newspaper, periodical, book and database publishers The third digit of a NAICS code repre- 51111 Newspaper publishers sents the subsector. Using the informa- 51112 Periodical publishers tion sector (sector 51) as an example, 51113 Book publishers there are four separate subsectors con- 51114 Database and directory publishers tained in the sector: publishing industries, 51119 Other publishers motion picture and sound recording in- 511191 Greeting card publishers dustries, broadcasting and telecommuni- 511192 All other publishers cations, and information and data pro- 5112 Software publishers cessing services. The forth digit of the 51121 Software publishers NAICS code represents the industry group 512 Motion picture and sound recording industries level. Under the publishing industries 5121 Motion picture and video industries subsector, for example, there are two in- 51211 Motion picture and video production dustry groups: newspaper, periodical, 51212 Motion picture and video distribution 51213 Motion picture and video exhibition book, and database publishing; and soft- 512131 Motion picture theaters, except drive-Ins ware publishing. 512319 Drive-in motion picture theaters The fifth digit in the NAICS code rep- 51219 Post production and other motion picture and video industries resents the international industry level. 512191 Teleproduction and other post-production services Continuing with the same example, there 512199 Other motion picture industries are 28 international-level industries in the 5122 Sound recording industries information sector. In most cases, there 51221 Record production will be comparability between the clas- 51222 Integrated record production/distribution sifications of the United States, Canada, 51223 Music publishers 51224 Sound recording studios and Mexico at the five-digit level. The 51229 Other sound recording industries sixth digit in the NAICS code designates national detail. This allows the flexibil- 513 Broadcasting and telecommunications 5131 Radio and television broadcasting ity to create more detailed statistics for 51311 Radio broadcasting the industries that hold particular impor- 513111 Radio networks tance in each country. Of the 28 interna- 513112 Radio stations tional industries within the information 51312 Television broadcasting sector, 6 have been broken out to create 5132 Cable networks and program distribution important national detail for the United 51321 Cable networks States. (Exhibit 2 shows the entire NAICS 51322 Cable and other program distribution structure for the information sector.) 5133 Telecommunications When the national detail is the same 51331 Wired telecommunications carriers 51332 Wireless telecommunications carriers (except satellite) in more than one country, the same six- 513321 Paging digit code is used in each country’s na- 513322 Cellular and other wireless telecommunications tional version of NAICS. The six-digit 51333 Telecommunications resellers system allows for greater data compara- 51334 Satellite telecommunications bility between the three countries than a 51339 Other telecommunications four- or five-digit system. There had been 514 Information services and data processing services significant differences in the former clas- 5141 Information services sification systems used by the United 51411 News syndicates States, Canada, and Mexico. NAICS cre- 51412 Libraries and archives ates a standard system to be used by each 51419 Other information services of the NAFTA trading partners. 514191 Online information services As shown in exhibit 3, there is no re- 514199 All other information services 5142 Data processing services lationship between the numeric industry 51421 Data processing services

Monthly Labor Review July 1998 45 Technical Note

Exhibit 3. Comparison of the information industry under NAICS during the transition period, SIC codes and SIC also will need to be assigned to create NAICS SIC linkages between statistics classified un- Industry Industry code code der the two classification systems. 51 Information No comparable grouping The ES-202 program will implement 511 Publishing industries No comparable grouping NAICS over a 3-year period. Beginning 5111 Newspaper, book, No comparable grouping in 1998, establishments classified in SIC periodical, and database industries that were not altered by the re- publishers vision will be assigned NAICS codes by 51111 Newspaper publishers 2711 Newspapers: publishing, or computer. In 1999, establishments with publishing and printing 50 or more employees will be assigned 51112 Periodical publishers 2721 Periodicals: publishing, or NAICS codes during the annual refile sur- publishing and printing vey. (Currently assigned SIC codes for 51113 Book publishers 2731 Books: publishing, or these establishments will be verified at publishing and printing (part) that time as well.) In addition, one-half 51114 Database and directory 2741 Miscellaneous publishing of all establishments with fewer than 50 publishers (part) employees that are currently classified 51119 Other publishers in SIC industries that were split into two 511191 Greeting card publishers 2771 Greeting cards (part) or more parts will be surveyed and as- 511199 All other publishers 2741 Miscellaneous publishing signed NAICS codes. This phased-in ap- (part) proach will allow BLS to calculate esti- 5112 Software publishers mates of the effects of NAICS by as early 51121 Software publishers 7372 Prepackaged software (part) as the end of fiscal year 1999. In 2000, all remaining uncoded establishments will be assigned NAICS codes. codes used in the SIC and those used in 1987. The new manual, for example, in- The timing of implementation for sur- NAICS. Also, the increase to a six-digit cludes a narrative definition of each in- veys such as the ES-202 and the Eco- code does not necessarily mean that there dustry, a list of illustrative economic ac- nomic Census is critical to many other is a corresponding increase in the level tivities used as criteria for classification statistical programs that draw their of detail for national industries. Under (index items), and a bulleted list of cross samples from the universe files main- the SIC system, for example, there were references for similar activities classified tained for these comprehensive surveys. 1,004 detailed industries, while under under other industry categories. Indus- Sample-based programs cannot convert NAICS there are 1,170. In the exhibit, tries will only include illustrative ex- to NAICS until the universe frames on NAICS industries 51111 and 51112 match amples and cross references when nec- which they are based have been revised. one-to-one with 1987 SIC industries 2711 essary. Another useful change from the Programs that use data from the universe and 2721, respectively. All other publish- SIC system is that users will now be able and from sample programs will be the last ing industries were broken out of larger to search for cross references in the same to implement NAICS. The Producer Price industries in the SIC, creating more in- place for each definition. (See Exhibit 4 Index (PPI), for example, uses BLS uni- dustry-level detail. In some cases, how- for an illustration of the new format, us- verse data for its sampling frame, data ever, two or more SIC industries were ing NAICS industry 511210, Software from the Economic Census for its struc- combined to form one NAICS industry, re- publishers, as an example.) ture weights, and other data produced by ducing the number of detailed industries the Department of Commerce for its net in that category. NAICS implementation output calculations. As a result, the con- version of the PPI to NAICS cannot be fully The NAICS manual for mat NAICS will require a significant effort to implemented until these programs have implement. Large universe surveys such converted to the new system. The U.S. NAICS manual, North Ameri- as the BLS Covered Employment and BLS currently is training staff persons can Industry Classification System— Wages (ES-202) program5 and the Cen- at the regional offices and cooperating United States, 1997, scheduled to be re- sus Bureau’s Economic Census6 will State agencies—those who will actually leased in late July 1998, will differ sub- have to assign new industry codes to the assign NAICS codes to establishments for stantially from its predecessor, The Stan- more than 7 million business establish- the ES-202 program. Training for the re- dard Industrial Classification Manual, ments in the United States. In addition, gional office staff began in June 1998,

46 Monthly Labor Review July 1998 Exhibit 4. The NAICS manual format for many new industries that formerly were not classified separately, and the 511210 Software Publishers inevitable time series breaks that occur whenever major revisions to classifica- This industry comprises establishments primarily engaged in computer soft- tion systems or statistical programs are ware publishing or publishing and reproduction. Establishments in this implemented. industry carry out operations necessary for producing and distributing computer software, such as designing, providing documentation, assisting in in- THE LONG TERM BENEFITS OF NAICS will far stallation, and providing support services to software purchasers. These es- outweigh the costs of implementing the tablishments may design and publish or publish only. new system. Specific economic data for many emerging industries soon will be Illustrative examples: available. Ultimately, NAICS will help Applications software publishing researchers, policymakers, and other ana- Database software publishing lysts to better understand the U.S. and Game software publishing global economies and the activities that Spreadsheet software publishing generate economic growth. Utility software publishing Footnotes Cross references. Establishments primarily engaged in— 1 See Administration introduces new industry classification system (Executive Office of the • Reselling packaged software—are classified in Sector 42, Wholesale Trade President, Office of Management and Budget), or Sector 44-45, Retail Trade; April 8, 1997. For more detailed information, see the NAICS page (http://www.census.gov/epcd/ • Designing software to meet the needs of specific users—are classified in www/naics.html) at the official Bureau of the Cen- U.S. Industry 541511, Custom Computer Programming Services; and sus website (http://www.census.gov/), accessed May 15, 1998. The new manual, North American • Mass duplication of software—are classified in U.S. Industry 334611, Soft- Industry Classification System—United States, ware Reproducing. 1997, is currently scheduled to be released in late July 1998 and may be ordered from the National Technical Information Service, 5285 Port Royal and the regional office personnel will new system will be difficult. For example, Road, Springfield, VA 22161. train the State coders within their regions the old SIC system had no category for 2 From 1938 to 1945, classification was based throughout the summer and early fall. telecommunications resellers, and hence on the Social Security Board Classification Manual. In 1945, the basis was changed to the BLS The training materials for staff were very little data were available for this in- Standard Industrial Classification Manual, which jointly developed by the Office of Em- dustry. Similarly, at the higher levels of has been used, with several revisions, ever since. ployment and Unemployment Statistics aggregation—such as the manufacturing See BLS Handbook of Methods, Bulletin 2490 (Bu- and the Office of Field Operations. or services divisions—many economic reau of Labor Statistics, April 1997), p. 44, for a activities formerly classified in one divi- brief explanation and history of the current classification system. sion are now classified in another. NAICS and data user s 3 See the NAICS page at the Bureau of the Cen- Another issue for data users involves sus website for copies of the Federal Register Although the implementation of NAICS the transition period, when some data notices and other background on the new classi- undoubtedly will benefit most data us- will be based on the SIC and other data fication system. 4 ers, the transition period may be diffi- will be based on NAICS. As previously See International Standard Industrial Clas- sification of All Economic Activities, 3rd rev. ed. cult. There will be breaks in many time noted, most government and other sta- (New York, United Nations Publications, 1990). series, for example, that are based on the tistical organizations will implement 5 For more information on the Covered Em- SIC system. The availability of time se- NAICS over a multiyear period. The re- ployment and Wages program, see BLS Handbook ries data is essential for trend analysis, sulting lack of comparability will create of Methods, Bulletin 2490 (Bureau of Labor Sta- economic forecasting, and seasonal ad- challenges for economic analysis. In sum, tistics, April 1997), pp. 42–47. 6 For more information on this survey, see the NAICS justment. In many cases, however, the the revision presents a tradeoff Economic Census page (http://www.census.gov/ NAICS changes are so significant that re- between a new and improved classifica- epcd/www/econ97.html) within the Bureau of the constructing historical data based on the tion system, which will help provide data Census website.

Monthly Labor Review July 1998 47