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Copyright 1997 by the Wyoming Department of Employment, Research & Planning

New Industrial Classification System Will Affect All Industry Statistics

by:Mike Evans

Recently, the Office of Management and Budget (OMB) introduced the North American Industry Classification System (NAICS) to replace the existing 1987 Standard Industrial Classification (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. Once the definitions have been agreed upon this summer, the three North American Free Trade Agreement (NAFTA) partners will implement NAICS. Printed materials detailing NAICS will not be available until late in 1997.

The purpose of an industrial classification system is to group industries and name 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 national, state, and local economies. Under the SIC system, one cannot compare between countries.

The evolution of the industrial classification system is nothing new, as 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 using high technological and other services sectors that have similar production processes. NAICS will reflect the restructuring of the economies, especially to accommodate past and on going changes in the economic structure of the countries.

The use of NAICS makes substantial structural breaks in time series in most industries. Time series breaks will affect projections and comparisons of statistics over time (i.e., comparing employment by industry from 1988 to 1998). This article will show 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, and is now under Agriculture, Forestry, & Fishing with NAICS due to trees being production-oriented to Forestry.

NAICS is a six-digit code, while a four-digit code identified SIC industries. The first two digits of NAICS identify the general Sector or major Division, while the third, fourth, and fifth digits are more specific to the operations of the industry. Each Sector or Division 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), while 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.

Affects of Transition on All Industries

The Table bridges the two systems and compares all major industries between the one-digit SIC Code(2) and the two-digit NAICS Code(3). OMB developed the NAICS system for compatibility with the SIC system, although the numerical codes will invariably change.

NAICS groups economic activity into 21 sectors, up from the 11 major divisions in the SIC system (see Table 1). The total number of industries is increasing to 1,171, compared with 1,004 under the SIC system. An example that illustrates why the number of sectors is increasing follows: NAICS classifies the Construction sector under Code 11 compared with Construction Division C under the SIC system, although Management, Support, Waste, & Remediation Services industry (Code 57) is added to the Construction industry under NAICS. The 1987 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 1997 and 1998 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 also in the broad sectors that we use to describe our economy. When changing from SIC to NAICS, there will be a total of 361 new industries not previously separately recognized, while 661 industries can be directly matched and 344 industries split into various industries. Often, differences in employment between NAICS and SIC may not be 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.

Affects on Various Industries

An example of the new system with the only direct match and no statistical affects from SIC to NAICS follows: under SIC, Mining is coded as Division B, but under NAICS, Mining is classified under the two-digit code 21 with the same definition. Agriculture, Forestry, & Fishing is another direct match, although part of the Agriculture, Forestry, & Fishing industry is under the Manufacturing industry 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, although 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 Manufacturing/Logging industry from NAICS and add it to 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 time (5) due to the shift of employment from the SIC Manufacturing industry to the Agriculture, Forestry, & Fishing industry, but will not be due to an economic affect.

On the other hand, the Professional, Scientific, and Technical Services (NAICS code 56) is a newly created sector within NAICS. NAICS will also create the new industry of Management, Support, Waste, & Remediation Services (Code 57) formally under the Services, TCPU (Transportation, Communications, & Public Utilities--Electric, Gas, & Sanitary Services), Manufacturing, and Construction industries. The Construction industry has been revised to include two sectors under NAICS: Construction and Management, Support, Waste, & Remediation Services (see Table 1) affecting comparisons over time.

Solution's & Conclusions

The past approach to preserving time series continuity (e.g., SIC change in 1987) after classification system revisions is to create linkages at the firm level where the series breaks. Over the next three years, producing a dual data series will create linkages using both the SIC and new classifications for a given period of transition from 1997 to 2000 enabling one to cross-reference NAICS and SIC. We can assess the full impact of the revisions with the dual classifications of data.

We will 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.

Mike Evans is a Senior Economist, supervising Bureau of Labor Statistics (BLS) programs with Research & Planning.

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

2. Office of Management and Budget; Standard Industrial Classification Manual 1987.

3. Federal Register, Office of Management and Budget; Economic Classification Policy Committee: SIC Replacement--- NAICS Proposed Industry Classification Structure 1996.

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

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

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