Economic Classification Policy Committee

                                    Issues Papers

                                 Issues Paper No. 3 
                                Collectibility of Data

                                       May 1993

          Note to reader:  This is the third in the series of Economic
          Classification Policy Committee issues papers.  The first two,
          Issues Paper No. 1, "Conceptual Issues," and Issues Paper No. 2,
          "Aggregation Structures and Hierarchies," were published in the
          Federal Register, March 31, 1993, pp. 16990-17004.  Copies are
          available by writing to Brenda M. Erickson, Economic
          Classification Policy Committee, Bureau of Economic Analysis
          (BE-42), U.S. Department of Commerce, Washington, D.C. 20230, or
          by telephone at 
          (202) 606-9615, FAX (202) 606-5311. 

                       Economic Classification Policy Committee
                                  Issues Paper No. 3

                                Collectibility of Data

          Introduction

            Economic Classification Policy Committee (ECPC) Issues Paper
          No. 1, "Conceptual Issues," and Issues Paper No. 2, "Aggregation
          Structures and Hierarchies," discuss structuring economic
          classifications according to the needs for use of the data.  It
          is important to emphasize that in meeting the needs of data
          users, statistical agencies are limited by the information that
          can be obtained from data providers, the respondents to
          government surveys.  Issues Paper No. 3 discusses the limitations
          on an economic classification system that arise from problems in
          collecting the data, and is a complement to Issues Papers Nos. 1
          and 2.
            Data collectibility limitations take two forms.  First, the
          coding of business responding units (currently, the
          establishment) is limited by the information that is available to
          the coding agencies to determine the industry of the respondent. 
          Section 3.1 discusses this limitation.  Necessary background,
          provided in section 3.1, is a review of current coding practices
          followed by the major government statistical agencies that are
          responsible for industry coding under the present system.
            A second collectibility problem goes beyond mere coding.  To
          provide meaningful information on an "industry," the units placed
          in that industry must be able to report the information being
          sought in statistical agency programs, such as employment, sales,
          revenues, intermediate purchases, prices, and so forth.  If a
          proposed industry does not meet the test of respondent
          reportibility, this also places practical limits on useful
          definitions of "industry."  This topic is discussed in section
          3.2.
            Finally, a classification system that is erected on an
          economic concept, as proposed in Issues Paper No. 1, may make
          demands on data collection that differ from those of the past. 
          This matter is discussed in section 3.3.

          3.1  Collectibility of Data - What Can the Statistical Agencies
          Code?

            Four agencies, Bureau of Labor Statistics, Bureau of the
          Census, Internal Revenue Service, and Social Security
          Administration, are responsible for most U.S. industry coding. 
          These agencies code establishments into a Standard Industrial
          Classification (SIC) each year or update SIC codes of
          establishments on a regular basis.  Besides providing internal
          classification information for use in their own programs, some
          agencies also provide classification information on small
          companies to the Census Bureau.  

          ECPC Issues Paper No. 3                                         2
           

            Following is a brief description of each agency's role in SIC
          coding, largely excerpted from Statistical Policy Working Paper
          11, "A Review of Industry Coding Systems" [6].    

          Bureau of Labor Statistics (BLS) 

            The BLS produces major data series on the work force, wages,
          and prices.  Detailed industry data are presented as part of many
          of these series, and information is collected and published at
          the 4-digit SIC level of detail as well as aggregated to the 2-
          and 3-digit level.  
            BLS updates each establishment's SIC code every 3 years based
          on information obtained through its Annual Refiling Survey (ARS). 
          Each year one-third of its universe of employers (establishments)
          is asked to verify or update industrial, geographic, and
          ownership codes.  Establishments list their principal products
          and activities and provide a percent of total sales or value of
          receipts for each.  The states are actually responsible for this
          update and specially-trained state personnel assign 4-digit SIC
          codes to establishments based on the ARS. 

          Internal Revenue Service (IRS)

            Industry coding by the IRS is based largely on self-coding by
          the taxpayers or coding from written descriptions of business
          activities on the tax returns.  For example, partnership and
          corporate tax return forms carry a taxpayer assigned Principal
          Business Activity (PBA) code, which may be constructed from a
          combination of 4-digit SIC codes or 2- or 3-digit SIC codes.
          Sole-proprietor businesses select from codes prelisted on the tax
          form and also describe their business activities.  

            Tax returns are classified by PBA annually for both employers
          and nonemployers.  The PBA code is the only source of SIC coding
          for many businesses and is the code used by Census for
          establishments not included its samples.  Since PBA codes are not
          as detailed as SIC codes, full coding to the present SIC system
          cannot be obtained.

          Social Security Administration (SSA)

            Currently, the SSA is responsible for assigning SIC codes to
          new businesses.  IRS Form SS-4, Application for Employer
          Identification Number, requires the business to describe its
          primary business activity, from which an SIC code is assigned by
          SSA personnel.  When additional information is needed to assign
          an SIC code, SSA sends a classification form which asks the
          business its principal business activities and if the business
          has two or more activities, the percent of business done in each. 
          These SIC codes for new businesses are then provided to Census

          ECPC Issues Paper No. 3                                         3
           

          for its use in updating and maintaining a current list of
          businesses and their activities.  
            SSA does not, however, always code to a 4-digit SIC, but may
          classify some business activities to a partial 2- or 3-digit code
          or to "foldback" codes.  Foldback codes are consolidations of two
          or more SIC codes in related areas and are used only in
          nonmanufacturing.  An example is retail restaurants and bars,
          which are two separate industries in the SIC (5812 and 5813). 
          SSA uses a foldback code 5811 for these businesses because these
          activities are commonly reported together on administrative
          sources with insufficient information to determine the primary
          activity.  Foldback codes are used for some industries to
          expedite coding, when further correspondence with the company is
          not desired, or because the SSA does not need the full detail for
          its statistical purposes.

          Bureau of the Census

            The Census Bureau has several programs which assign or update
          industry codes--Economic Censuses, Annual Survey of Manufactures,
          and annual business register updating for the Standard
          Statistical Establishment List (SSEL), including the Company
          Organization Survey.  The economic censuses, conducted every 5
          years, include approximately 4.2 million establishments.  All
          multi-establishment companies are included in the censuses, but
          only about 3 million single-establishment companies are included. 
          Information on the remaining 10 million small
          single-establishment companies is obtained from the
          administrative records of the IRS and the SSA through the
          processes described in previous sections.  Use of IRS and SSA
          records significantly reduces the reporting burden for small
          firms.  
            Detailed information on products, materials, and types of
          business activities is collected in the economic censuses.  A
          4-digit SIC code is derived from the detailed data reported by
          establishments and is compared against the SIC code in Census
          files. Information is used to update the SIC code if an SIC code
          exists or to assign a code if none resides in Census files.
            For example, establishments producing knit shirts can be
          classified in industry 2253, Knit Outerwear Mills, or 2321, Men's
          and Boys' Shirts, Except Work Shirts, depending on whether the
          shirt is knit from yarn (2253) or cut and sewn from purchased
          knit fabric (2321).  To code such establishments correctly, a
          check is first made to determine the materials used, i.e.,
          whether the establishment reports using yarn or fabric.  Next a
          check is made to determine the type of business and kind of
          operations reported by the business, i.e., making knit apparel
          from yarn or making apparel from purchased fabrics.  If the
          business uses yarn to make the fabric and checks that it is a
          knitting mill, the business is coded into industry 2253.  If it

          ECPC Issues Paper No. 3                                         4
           

          uses purchased fabric and checks that it is a cut and sew
          operation, the establishment is coded into industry 2321.  If
          there is a conflict between the two items, further information is
          requested.
            The Company Organization Survey, mailed annually to companies
          with 50 employees or more, asks companies to update, via a
          written description, the SIC code for each establishment they
          own.  Companies with fewer than 50 employees are sampled and
          updated.

          Information Required for SIC Coding

            As Thomas Jabine stated some time ago, the present system
          requires a great deal of information for coding 4-digit SIC
          industries:
            "In a broad sense, information is needed about the economic
          activities of an establishment:  what products it produces,
          processes, or sells, and what services it provides.  With respect
          to products, it is sometimes necessary to know what materials are
          used and whether they are produced in the same establishment.  It
          may also be necessary to know how products will be used and
          whether they are custom produced for particular clients.  It is
          often necessary to know the process used to produce them and
          where they are produced.  With respect to sales, it is essential
          to know the major class of customers, since that is the main
          basis for distinguishing wholesale and retail industries.  It is
          also necessary in some cases to know whether the product is new
          or used, and what the method of selling is:  from a store, by
          mail order, from vending machines, or door to door.  For
          services, it is necessary to know whether they are for other
          establishments in the same enterprise or for external clients.... 
          It may be necessary to know the particular product or service,
          the location from which it is leased or rented, whether the
          lessee is acquiring an equity and, for certain kinds of
          equipment, whether an operator is provided.  
            "Some information requirements are hard to fit into any
          general category.  For example, drug stores are classified
          primarily by their  trade designation,  i.e., whether the
          business name implies that the establishment is a drug store.... 
          For banks, it is necessary to know if they are chartered by the
          National Bank Act or by one of the states or territories.   
            "When an establishment has activities in more than one SIC
          industry, it is always necessary to know the relative importance
          of its activities, based on whatever measure has been adopted for
          the coding system.  The simplest principle is to assign the code
          for the industry with the largest proportion of total activity,
          but more complex rules apply in some cases (drug stores)." [4]
            Only the Census Bureau and only economic censuses collect all
          of the required information for detailed SIC coding.  IRS and SSA
          rely on written descriptions or check boxes which list, as

          ECPC Issues Paper No. 3                                         5
           

          explained earlier, principal business activity codes which may or
          may not equate directly to a 4-digit SIC code.  Census codes 4.2
          million establishments, while SSA and IRS code the remaining 10+
          million establishments.  

          Implications of the Present System for SIC Coding

            The present system requires detailed information on an
          establishment's activity for correct coding.  This information is
          now only collected for 4.2 million establishments included in the
          economic censuses.  Codes are assigned by BLS, SSA, and IRS on
          much less information.  This may lead to erroneous coding or an
          increase in uncoded establishments.
            For example, Census has found over the past few years that the
          number of uncoded new establishments received from administrative
          sources has increased significantly.  Census recently compared
          SIC codes received from other agencies to codes derived from
          Census sources.  The study found that Census and PBA codes
          matched only 72 percent of the time at the 2-digit level.  This
          study underscores the need for a restructured SIC that either
          simplifies coding or allows for new procedures to assure that
          proper codes are assigned to establishments by all agencies.
            In the past, proposals for 4-digit SIC industries have
          sometimes been rejected when non-Census statistical agencies were
          unable to code establishments accurately into 4-digit industries
          from the written or check box information used for coding.  An
          example is a request to separate "fast food restaurants" from SIC
          5812, Eating Places.  
            The current SIC 5812 includes all types of eating places, from
          ice cream and soft serve shops to cafeterias to fast food places
          to sit down restaurants.  Fast food has not been established as a
          separate 4-digit industry because non-Census agencies find it
          difficult to code to this level of detail.  A fast food
          restaurant is likely to describe its activity as "restaurant
          services" rather than as a "refreshment" or "fast food"
          restaurant.  The cost to the other agencies to identify fast food
          restaurants is excessive and the information is not needed for
          agency programs.  
            Census, however, recognizes these distinctive restaurant
          activities in its census of retail trade and assigns a code that
          is more detailed than the 4-digit industry code.  For industry
          5812, businesses are asked to check a box which best describes
          their activity.  There are seven possible restaurant activities:
          restaurants; social caterers; cafeterias; refreshment places
          (fast food restaurants); contract feeding; ice cream and soft
          serve shops; and frozen yogurt shops.
            In the 1987 census, separate information on the number of
          establishments, sales, payroll, and number of employees was
          published on three of these kinds of activities:  restaurants,
          cafeterias, and refreshment places (fast food).  In 1987, there

          ECPC Issues Paper No. 3                                         6
           

          were 154,700 restaurants with a total value of sales of $66.4
          billion and 135,100 refreshment places with sales of $56.9
          billion.  These activities meet the size criteria and have the
          specialization ratio necessary to be recognized as 4-digit
          industries, based on the guidelines used in past SIC revisions
          (see forthcoming ECPC Issues Paper No. 4, "Criteria for
          Determining Industries").    

          Possible Changes in Agency Coding Responsibilities

            As part of a major effort to reduce the tax reporting
          requirements on employers, the IRS is currently studying changes
          in the employer tax reporting forms that provide the information
          for some current SIC coding.  Simplified employer forms may have,
          as well, implications for SIC coding beyond the agencies that now
          make direct use of IRS coding for statistical purposes.
            Though it is too early to determine the implications for SIC
          coding of any changes in employer tax reporting requirements that
          may eventually be put into effect, the ECPC is discussing the
          matter with the IRS Statistics of Income Division, and will take
          tax reporting changes into account in its review of economic
          classification systems.

          3.2  Collectibility - What Data Can Business Provide?

            Statistical agencies must assure that information collected is
          reportable by companies with a minimum of burden.  Whether
          businesses can provide the data is a major consideration in
          determining whether or not 4-digit industries can be established. 
          Requests to collect information that is not readily available
          from existing company records or that would impose excessive
          costs and burden on businesses are rejected.
            For example, there has been increased interest in establishing
          a 4-digit industry for "tourism."  This would include, in
          addition to travel agencies, theme parks, etc., parts of many
          industries currently recognized separately in the SIC, such as
          hotels and airlines.  To capture the activities of the "tourism"
          industry, it would be necessary for hotels, restaurants, and
          airlines to differentiate receipts between business and tourist
          customers.  Travel agencies also would need to report whether or
          not receipts were for business or personal travel.  To provide
          for a 4-digit tourism industry, or for an aggregation at a higher
          level, it also would be necessary to separate employment and
          expense data between those associated with tourism and those
          associated with business travel.  Since it is highly improbable
          that a business (hotel or restaurant) could provide this kind of
          information, the data are not collectible because business does
          not maintain its records in this manner.  The costs and burden to
          businesses to provide this kind of information are probably
          excessive.  If there are compelling reasons for recognizing

          ECPC Issues Paper No. 3                                         7
           

          industries such as "tourism," alternative and innovative
          approaches to measuring such problem sectors should be explored.
            Small businesses have been growing in number and importance in
          the past few years.  The 1992 Census of Construction Industries
          pretest found that small companies in the construction industry
          generally maintain records based on tax reporting guidelines and
          often do not have the detailed kind of information needed to
          assign industry codes.  Census experience with the economic
          censuses indicates this is true for most small businesses in all
          sectors.  Small business classification must be simple, impose
          minimal burden, and be cost effective.
            In 1989, the Census Bureau conducted a Recordkeeping Practices
          Survey [3] to determine the kinds of information maintained in
          company records.  Questions were asked about the availability of
          detailed information such as employees by function, capital
          equipment expenditures, and sales of products or services by
          type.  The survey found that recordkeeping practices vary widely,
          both within and across industries.  Surprisingly, recordkeeping
          practices also vary within companies.  Information such as
          employment and payroll is usually available by establishment, but
          detailed information on materials consumed or purchased and
          products and services produced or sold by type is much more
          difficult to report.

          3.3  Data Needed for Classification (Restructured System)

            The International Conference on the Classification of Economic
          Activities [2] identified the lack of a single, conceptual
          framework as a problem with the existing system.  The conflicting
          views on the importance of a conceptual framework are outlined in
          ECPC Issues Paper No. 1.
            Two primary concepts have been proposed for a restructured
          classification system:  supply-based (production process) and
          demand-based.  Regardless of the conceptual basis, information is
          required for classification.  Let us briefly examine what
          information may be required under each concept.  
            A demand-based classification system requires detailed
          information on the output of the unit from which information is
          collected.  Joel Popkin (Williamsburg Conference [5], p. 186)
          proposes the development of a demand-based system.  He states
          that, "output aggregation would classify commodities on the basis
          of the markets in which they are sold.  To a great extent this
          type of aggregation would also reflect end-user, i.e., whether
          the market serves final or intermediate consumption.  The focus
          would be on the aggregation of commodities and services, wherever
          produced, by similarity in characteristics."  Depending upon the
          kind of demand-based system developed, the following kinds of
          information might be required:
               Type and value of products sold or services rendered.

          ECPC Issues Paper No. 3                                         8
           

               Class of customer to which the product is sold or the
               service is rendered, e.g., other businesses, consumers,
               government, etc.  For services, this may mean whether the
               service is provided for other establishments in the same
               enterprise or for external clients.
               End use of the product.
               Characteristics of the product.
               Boundaries of the market, or a listing of other products or
               services that are close substitutes or are marketed or used
               together.
            For a supply-based or production process system, Joel Popkin
          (ibid, p. 187) states that "to group establishments by similarity
          of production structure, their production structure must first be
          identified."  More specifically, for a supply-based system the
          following information might be required:
               Production process used to produce the resulting product or
               set of products.  This may include whether or not the output
               is a product of a vertically integrated plant or an assembly
               plant or the method of manufacturing used.
               Capital equipment input quantities or costs.
               Materials and services input quantities or costs.
               Labor input quantities or costs.
               Energy input types, quantities, or costs.
               Characteristics of the labor force (especially for
               services).
            Much of the information needed for classifying establishments
          into either a demand-based or a supply-based system is now
          collected in the economic censuses.  The current system is,
          however, a multiple concept system (see Issues Paper No. 1), and
          it is not at yet clear if information could be collected to
          classify all establishments based on a single concept.  It also
          is not clear if coding would be more or less difficult than it is
          in the present system.  That depends on the availability of
          information in company records and the ability of agencies that
          code establishments to collect the information.  

          Discussion

            What is collectible from businesses and what information
          agencies responsible for coding in the decentralized U.S.
          statistical system can collect are critical issues that the
          Committee must address in defining a framework for an economic
          classification system.  As it considers these issues, there are
          important points to keep in mind.
               The economy is dominated by a relatively few, large
               companies that operate hundreds and thousands of locations. 

               *    There are 15 million+ businesses in the United States,
                    9 million of which have no paid employees and probably
                    account for less than 5-10 percent of economic

          ECPC Issues Paper No. 3                                         9
           

                    activity.  IRS is responsible for assigning SIC codes
                    to these 9 million companies with no paid employees. 
               *    165,000 companies operate more than 1 million
                    establishments and account for approximately 45 percent
                    of economic activity.  Census collects detailed
                    information, sufficient for SIC coding, from these
                    establishments every 5 years, with most of them updated
                    at least once between censuses.
               Detailed information on economic activities, necessary for
               the assignment of SIC codes, is only available in the
               economic censuses, which
               *    are conducted every 5 years;
               *    cover only 4.2 million establishments; and
               *    under existing legislation, the classification of these
                    4.2 million establishments cannot be shared with other
                    agencies.
          Depending upon the information needed, Census may be the only
          agency with the data necessary to classify statistical units
          using a conceptual basis.
            Any decisions on the structure of an industry classification
          system must take into account the ability of the data provider to
          furnish the required information without undue burden.  Business
          responding units must be able to report the information needed
          without undue burden and government agencies responsible for SIC
          coding must be able to code the activities without undue cost. 
          Proposals for new or altered 4-digit industries that are
          presented for the Committee's review should include consideration
          of the collectibility of the data needed for establishing an
          industry before presenting proposals for the Committee's review. 
          Each proposal will be closely examined to assure that the issue
          of collectibility of data has been addressed.
            In the decentralized U.S. Government statistical system, it is
          extremely important that agencies such as IRS and SSA provide
          industry codes to statistical agencies for business entities
          through their administrative sources.  Both cost and burden
          savings mandate this approach to industry coding.  What agencies
          can collect within their resources is as important as what
          information businesses can provide to these agencies.  Each of
          the agencies coding business entities has different legal and
          administrative responsibilities, and it is important to
          understand the different uses of SIC coded data for each of these
          agencies.  

          Request for Comment

            The Committee is interested in the kinds of data that
          businesses can report and the most efficient methods for
          reporting that data.  The Committee invites comments on what
          kinds of information can be reported by businesses, including the

          ECPC Issues Paper No. 3                                        10
           

          availability of that data within company records and possible new
          avenues to explore in the realm of data collection. 
            Assigning industry codes to 15 million businesses in the
          decentralized statistical system of the United States is
          difficult.  Are there ways not currently considered that would
          minimize cost and burden to both business and the government? 
          How can agencies responsible for classification coding assure
          accurate coding with a minimum of cost and burden to both
          business and the government?  The Committee invites comments on
          these questions. 

          References

            [1] Bureau of the Census, "Characteristics and Quality of the
          SSEL Standard Industrial Classification (SIC) Codes," U.S. Bureau
          of the Census Research and Evaluation Paper, February 1993. 
            [2] Bureau of the Census, Proceedings, International
                                      ___________
          Conference on Classification of Economic Activities,
          Williamsburg, Virginia:  U.S. Department of Commerce, November
          6-8, 1991.  587 pages.  (Referenced in the following as: 
          Williamsburg Conference.)  Available from Bureau of the Census,
          Room 2069-3, Washington, D.C. 20233.
            [3] Bureau of the Census, 1989 Recordkeeping Practices Survey,
                                      ___________________________________
          U.S. Department of Commerce, December 1990.  27 pages.  Available
          from Bureau of the Census, Room 2069-3, Washington, D.C.  20233
            [4] Jabine, Thomas B., "The Comparability and Accuracy of
          Industry Codes in Different Data Systems," Committee on National
          Statistics, Commission on Behavioral and Social Sciences and
          Education, National Research Council, National Academy Press,
          Washington, D.C., 1984.
            [5] Popkin, Joel, "Recommendation and Description of the
          Principles Upon Which a Revised Industrial Classification System
          Should Be Built," Williamsburg Conference, pp. 157-216.
            [6] U.S., Executive Office of the President, Office of
          Management and Budget, A Review of Industry Coding Systems,
                                 ___________________________________
          Statistical Working Paper 11, Statistical Policy Office, Office
          of Information and Regulatory Affairs, March 1984.