New Industrial Classification System Will Affect All Industry Statistics
by: Mike Evans, BLS Program Supervisor

"The structure of NAICS taxonomy is based on a production-oriented, or supply-based, conceptual framework instead of an output-based framework."

T his article first appeared in the April 1997 issue of Trends to provide information on the upcoming classification changes in industry statistics. The time has finally come to introduce the North American Industry Classification System (NAICS) using 1999 and 2000 employment data for Wyoming. Listed in Table 1 and Table 2 of the following article are the most recent employment data for Wyoming grouped by NAICS sectors. Employment organized by Standard Industrial Classification (SIC) is found in Table 2 of the second article. For your convenience, we plan to publish employment using both SIC and NAICS classifications for the next year, so you can become familiar with the new sectors. The updated reprint below, “New Industrial Classification System Will Affect All Industry Statistics,” should help you understand the differences between the SIC and NAICS classification systems.

R ecently, the Office of Management and Budget (OMB) introduced NAICS to replace the existing 1987 SIC system and the previous classification revision of 1972. The NAICS Administrative Committee, headed by OMB, defined NAICS jointly with Canada and Mexico to obtain comparable economic and statistical information, combining the three countries’ existing classification systems for economic analysis of trends and developments.

The purpose of an industrial classification system is to group industries and categorize firms according to common characteristics, so that one can organize specific statistical information such as import/export, employment, tax revenues, and/or wage information. They can classify, or code, any business or establishment into an industry. In addition, the NAICS system makes it possible to compare industry statistics among international, state, and local economies. Under the SIC system, one cannot make direct comparisons between countries.

The evolution of the SIC industrial classification system is nothing new. It has been revised every 10 to 15 years since its inception in the 1930’s. The change from SIC to NAICS, however, represents a fundamental break with the past in certain industries. The new system gives special attention to new and emerging industries, especially those considered highly technological and other sectors that have similar production processes. NAICS will reflect the restructuring of the economies, especially to accommodate past and ongoing changes in the economic structure of the countries.

The use of NAICS makes substantial structural time series breaks in most industries. Time series breaks will affect projections and comparisons of statistics over time (i.e., comparing employment by industry in 1998 to 1988). This article shows the interrelationship between the 1987 SIC and the new classification system, and the changes taking place.

Differences Between the Two Systems

The structure of NAICS taxonomy is based on a production-oriented, or supply-based, conceptual framework instead of an output-based framework, which characterized SIC. For example, in the Manufacturing industry, logging is based on log output under SIC. It is now under Agriculture, Forestry, & Fishing within NAICS due to trees being production-oriented to forestry.

NAICS uses a six-digit code, while a four-digit code identified SIC industries. NAICS has alternative groupings to more closely resemble the SIC major industries, although the first two digits of NAICS identify the general sector, while the third, fourth, and fifth digits are more specific to the operations of the sector. Each sector is divided into many groups and each group is separated further into specific production operations identified by five- and six- digit NAICS codes. For example, the Mining sector (two-digit) is divided into three groups (three-digit): oil & gas extraction; mining except oil & gas; and support activities for mining. The mining except oil & gas industry is divided into three more groups (four-digit): coal; metal ore; and non-metallic mineral, and so on (See Figure 1).

The NAICS Administrative Committee standardized the first five digits of the NAICS code between countries striving for compatibility at the two-digit level with the International Standard Industrial Classification (ISIC).¹ The sixth digit is used to identify subdivisions to satisfy user needs in individual countries. Provided that one meets other measurement standards (i.e., monetary exchange rates), one could make direct comparisons among the three national economies.

Effects of Transition on All Industries

The Table bridges the two systems and compares all major industries between the one-digit SIC Code² and the two-digit NAICS Code.³ OMB developed the NAICS system for compatibility with the SIC system, although the numerical codes will always change.

NAICS groups economic activities into 21 sectors, up from the 10 major divisions in the SIC system (see the Table). The total number of industries increased to 1,171, compared with 1,004 under the SIC system. The 1987 SIC system left three-quarters of all firms by industry unchanged from the previous classification system of 1972; NAICS will leave two-thirds unchanged compared with the SIC system, but they will be re-numbered, re-labeled, and described differently.

More than one-third of the industries formerly coded in the SIC system will be split into new NAICS designations. Series disruptions could affect a total of 511 industries and cause comparisons between 1999 and 2000 economic activity to be distorted. Some industries will have time series breaks in the data greater than three percent of the 1992 value of output for the 1987 industry.⁴ There are a total of 256 industry breaks for all industries. These time series breaks not only cause statistical disruptions for the users in the industries redefined, but in the broad sectors that we use to describe our economy.

When changing from SIC to NAICS, there are a total of 361 new industries not previously recognized separately, while 661 industries are directly matched and 344 industries split into various sectors. Often, differences in employment between NAICS and SIC are not due to firms having changed their primary industrial activity, but due to the different coding assignments, which cause time series breaks even when the new system directly matches the SIC system.

Effects on Various Industries

Some industries are not statistically affected by the change. The number codes are changed to reflect the correct NAICS code, but the definition remains the same. For example, under SIC, iron ore mining is coded as 1011, but under NAICS, iron ore mining is classified under the code 21221 with the same definition.

Agriculture, Forestry, & Fishing, on the other hand, is an example of a time series break. Part of the Agriculture, Forestry, & Fishing industry under the Manufacturing and Services industries with SIC coding, affecting comparisons over time. For example, a large portion of the Manufacturing industry from the SIC system; logging, moved into the Agriculture, Forestry, & Fishing industry, though the industry is existing rather than a new and emerging industry (see Figure 2). To compare employment levels from NAICS back to the SIC system for the Agriculture, Forestry, & Fishing industry, one would have to subtract the employment moved from the SIC category in the form of the logging industry from NAICS and add it back into the SIC system Agriculture, Forestry, & Fishing industry. This kind of change, shifting logging from the Manufacturing industry to the Agriculture, Forestry, Fishing, & Hunting sector, will influence major industry comparisons over time⁵ due to the shift of employment from the SIC Manufacturing industry to the Agriculture, Forestry, Fishing, & Hunting sector, but is not due to an economic effect.

Alternatively, the Professional, Scientific, & Technical Services (NAICS code 54) is a newly created sector within NAICS. NAICS will also create a new sector Administrative, Support, Waste Management, & Remediation Services (Code 56) formally under the Services, Transportation, Communications, & Public Utilities (TCPU), Manufacturing, and Construction industries. OMB has now revised the Construction industry into two sectors under NAICS: Construction, and Administrative, Support, Waste Management, & Remediation Services (see Table) affecting comparisons over time.

Solutions & Conclusions

The past approach to preserving time series (e.g., SIC change in 1987) after classification system revisions is to create linkages at the firm level where the series breaks. Producing a dual data series will create linkages using both the SIC and new classifications for a given period of transition, enabling one to cross-reference NAICS and SIC. We can assess the full impact of the revision, with the dual classifications of data.

We see the conversion from the SIC system to NAICS as an important step in providing a strong foundation for statistical information in coming decades. Nonetheless, the immediate challenge is to help the users of the data deal with the series breaks over time.

1 Carole A. Ambler, Bureau of the Census, Services Division, An Update on the Development of the North American Industrial Classification System (NAICS), October 1995. 

2 U.S. Office of Management and Budget, Standard Industrial Classification Manual, 1987.

3 U.S. Office of Management and Budget, “Economic Classification Policy Committee: SIC Replacement—NAICS Proposed Industry Classification Structure,” Federal Register, Volume 61, 1996. 

4 Paul T. Zeisset and Mark E. Wallace, Bureau of the Census, Economic Planning and Coordination Division, How will NAICS Affect Data Users?, October 1996. 

5 Al Stoebig, Northwest Oregon Regional Economist, “Time for a Change,” Oregon Labor Trends, December 1996.

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