Monthly Labor Review July 1998 43

Technical Note

Introducing the North

American Industry

Classification System

John B. Murphy

In 1997, the Office of Management and

Budget (OMB) announced the adoption

of a new standardized system for classifying industries—the North American Industry Classification System (NAICS).1

NAICS will replace the Standard Industrial Classification (SIC) system and thus

represents one of the most profound

changes for government statistical programs since the 1930s.2 Although the

current system has been revised and updated periodically, the basic structure has

remained intact since its inception. The

NAICS revision is much broader—many

more industries are identified under the

new system, and they are organized on

the basis of their production activities

(supply) alone, as opposed to the mixture of supply and demand characteristics used to classify industries under the

SIC. NAICS also seeks to standardize the

classification systems of the three partners to the North American Free Trade

Agreement (NAFTA), the United States,

Canada, and Mexico.

Industrial classification systems provide the structure for collecting and aggregating economic data, as well as for

analyzing, presenting, and disseminating

such data. Economic changes that have

taken place in the last several decades—

such as the movement toward a more services-oriented economy, the increased

use of computers and other new technology, and globalization—have precipitated the need for a new system of industrial classification. Twenty years ago, for

example, there was no need for statistics

on communications resellers, database

publishers, Internet service providers, or

electronic publishers. NAICS identifies

these and other emerging economic activities that do not easily fit into the current SIC structure.

Although converting to NAICS will

provide many advantages, the transition

to the new system also will create some

difficulties for data collectors and users.

Breaks will occur, for example, in many

time series that are based on the SIC system. This report provides a brief overview of NAICS—covering its background,

development, principles, structure, and

implementation—and also discusses

some of the issues that data collectors and

users must face as more and more government and private statistical programs

convert to the new system.

Background

Over the course of its economic history,

the United States has gone from a largely

agrarian economy in its earliest period,

to one based more on manufacturing following the Industrial Revolution, to the

current, more services-oriented economy

of the late 20th century. To better accommodate the many new manufacturing industries and other changes that had occurred in the early 1900s, the Standard

Industrial Classification (SIC) system was

developed in the 1930s. The SIC system

provided a consistent framework for assigning descriptive industry codes to each

establishment, as well as for the subsequent collection, tabulation, and analysis of economic statistics by government

agencies and private research firms.

Since its inception, the SIC system has

been revised and updated periodically,

about every 10 or 15 years. The most recent revision took place in 1987, when a

number of new high technology industries were identified, especially within

computer-related services. Categories for

computer and software stores, video tape

rental stores, and plastic bottle manufacturers, for example, were introduced for

the first time in 1987.

The 1987 revision left 75 percent of

the industries unchanged, however, and

the basic structure of the system was left

largely intact. Also, while the SIC system

adequately reflects the manufacturing

sector of the economy, it provides insufficient detail for the services sector.

Newly developed industries in information services, health care provision, and

even high-tech manufacturing cannot be

adequately studied under the current SIC

system because they are not separately

identified at the most basic level of aggregation, the industry level.

Another shortcoming of the U.S. SIC

system was that it was not strictly comparable with its counterparts in Canada

and Mexico. To address this problem,

representatives from all three Nations

worked cooperatively to develop NAICS.

The new system makes it possible to create comparable economic statistics from

the three NAFTA trading partners.

NAICS development

The development of NAICS began at the

International Conference on the Classification of Economic Activities held in

Williamsburg, Virginia, in 1991. In 1992,

OMB established the Economic Classification Policy Committee (ECPC)—

chaired by the Bureau of Economic

Analysis, and with representatives from

the Bureau of Labor Statistics and the Bureau of the Census—to study alternate

economic concepts (supply versus demand) by which to categorize industries

and to recommend changes to the SIC

system. In 1994, the ECPC chartered six

subject-matter subcommittees and a Coordinating Committee to propose the

structure of NAICS. The subject-matter

subcommittees were charged with reviewing current industries and evaluating proposals for new NAICS industries

John Murphy is a supervisory economist in the

Division of Occupational and Administrative Statistics, Bureau of Labor Statistics.
44 Monthly Labor Review July 1998

Technical Note

on the basis of production or supplybased activities, as opposed to the former

system that used a mixture of production

and marketing (demand-based) activities

as criteria for categorization.

To notify the public and evaluate their

response, the proposed changes were

published in a series of Federal Register

notices from 1994 through 1996. In these

notices, the ECPC solicited the help and

advice of U.S. Government agencies,

trade associations, data producers and

users, researchers, academics, and the

general public. The subject-matter subcommittees negotiated the structure of

NAICS with their counterparts in Canada

and Mexico during 1995 and 1996. The

adoption of the new classification system was announced by OMB in a notice

published in the Federal Register of

April 9, 1997.3

Principles of NAICS

The former SIC system used a mixture of

concepts to categorize economic activity. Some categories were based on demand groupings, activities that were

similar in the eyes of customers or users

of the product or service. Others, however, were based more on supply groupings. NAICS is the first industrial classification system used in the United States

to employ a unified economic concept

to define industries. Under the new system, industries are classified on the basis of their production or supply function—establishments using similar raw

material inputs, capital equipment, and

labor are classified in the same industry.

This approach creates more homogeneous categories that are better suited for

economic analysis.

Four primary concepts were used in

the development of NAICS. First, a production-oriented conceptual framework

was used—as described earlier, establishments engaged in similar production

activities are classified together. Second,

new categories in NAICS focus on emerging industries, services in general, and

industries that produce advanced technology. Third, as much as possible, continuity with the former system was maintained to avoid breaks in time series.

However, because of differences in the

classification systems formerly used by

the United States, Canada, and Mexico,

many changes were needed to make them

comparable. Thus, some breaks in time

series were unavoidable. Finally, the developers of NAICS strove for compatibility with the two-digit level of the International Standard Industrial Classification of All Economic Activities.4

Structure of NAICS

While NAICS uses a hierarchical structure

much like the existing SIC, there are a

number of important structural differences. For example, NAICS uses a sixdigit classification code which allows

greater flexibility in the coding structure.

The SIC system was limited to only four

digits. Another important difference is

that NAICS uses the first two digits of the

six-digit code to designate the highest

level of aggregation, with 21 such twodigit industry sectors under the new system. Under the SIC system, by contrast,

Exhibit 1. NAICS structure and SIC structure compared

NAICS SIC

Sector (two-digit) Division (letter)

Subsector (three-digit) Major group (two-digit)

Industry group (four-digit) Industry group (three-digit)

NAICS international industry (five-digit) Industry (four-digit)

National industry (six-digit)

NAICS sectors SIC divisions

11 Agriculture, forestry, fishing A. Agriculture, forestry, and fishing

and hunting B. Mining

21 Mining C. Construction

22 Utilities D. Manufacturing

23 Construction E. Transportation, communications,

31-33 Manufacturing electric, gas, and sanitary services

42 Wholesale trade F. Wholesale trade

44-45 Retail trade G. Retail trade

48-49 Transportation and warehousing H. Finance, insurance, and real estate

51 Information I. Services

52 Finance and insurance J. Public administration

53 Real estate and rental and leasing K. Nonclassifiable establishments

54 Professional, scientific and

technical services

55 Management of companies and

enterprises

56 Administrative and support, waste

management and remediation

services

61 Educational services

62 Health care and social assistance

71 Arts, entertainment, and recreation

72 Accommodations and food services

81 Other services (except public

administration)

92 Public administration

99 Unclassified establishments
Monthly Labor Review July 1998 45

there were only 11 divisions, designated

by letters of the alphabet. (A tabular comparison of terminology and a full list of

NAICS sectors and SIC divisions are shown

in exhibit 1.)

The third digit of a NAICS code represents the subsector. Using the information sector (sector 51) as an example,

there are four separate subsectors contained in the sector: publishing industries,

motion picture and sound recording industries, broadcasting and telecommunications, and information and data processing services. The forth digit of the

NAICS code represents the industry group

level. Under the publishing industries

subsector, for example, there are two industry groups: newspaper, periodical,

book, and database publishing; and software publishing.

The fifth digit in the NAICS code represents the international industry level.

Continuing with the same example, there

are 28 international-level industries in the

information sector. In most cases, there

will be comparability between the classifications of the United States, Canada,

and Mexico at the five-digit level. The

sixth digit in the NAICS code designates

national detail. This allows the flexibility to create more detailed statistics for

the industries that hold particular importance in each country. Of the 28 international industries within the information

sector, 6 have been broken out to create

important national detail for the United

States. (Exhibit 2 shows the entire NAICS

structure for the information sector.)

When the national detail is the same

in more than one country, the same sixdigit code is used in each country’s national version of NAICS. The six-digit

system allows for greater data comparability between the three countries than a

four- or five-digit system. There had been

significant differences in the former classification systems used by the United

States, Canada, and Mexico. NAICS creates a standard system to be used by each

of the NAFTA trading partners.

As shown in exhibit 3, there is no relationship between the numeric industry

Exhibit 2. Complete NAICS structure for information sector

51 Information

511 Publishing industries

5111 Newspaper, periodical, book and database publishers

51111 Newspaper publishers

51112 Periodical publishers

51113 Book publishers

51114 Database and directory publishers

51119 Other publishers

511191 Greeting card publishers

511192 All other publishers

5112 Software publishers

51121 Software publishers

512 Motion picture and sound recording industries

5121 Motion picture and video industries

51211 Motion picture and video production

51212 Motion picture and video distribution

51213 Motion picture and video exhibition

512131 Motion picture theaters, except drive-Ins

512319 Drive-in motion picture theaters

51219 Post production and other motion picture and video industries

512191 Teleproduction and other post-production services

512199 Other motion picture industries

5122 Sound recording industries

51221 Record production

51222 Integrated record production/distribution

51223 Music publishers

51224 Sound recording studios

51229 Other sound recording industries

513 Broadcasting and telecommunications

5131 Radio and television broadcasting

51311 Radio broadcasting

513111 Radio networks

513112 Radio stations

51312 Television broadcasting

5132 Cable networks and program distribution

51321 Cable networks

51322 Cable and other program distribution

5133 Telecommunications

51331 Wired telecommunications carriers

51332 Wireless telecommunications carriers (except satellite)

513321 Paging

513322 Cellular and other wireless telecommunications

51333 Telecommunications resellers

51334 Satellite telecommunications

51339 Other telecommunications

514 Information services and data processing services

5141 Information services

51411 News syndicates

51412 Libraries and archives

51419 Other information services

514191 Online information services

514199 All other information services

5142 Data processing services

51421 Data processing services

NAICS code Industry
46 Monthly Labor Review July 1998

Technical Note

codes used in the SIC and those used in

NAICS. Also, the increase to a six-digit

code does not necessarily mean that there

is a corresponding increase in the level

of detail for national industries. Under

the SIC system, for example, there were

1,004 detailed industries, while under

NAICS there are 1,170. In the exhibit,

NAICS industries 51111 and 51112 match

one-to-one with 1987 SIC industries 2711

and 2721, respectively. All other publishing industries were broken out of larger

industries in the SIC, creating more industry-level detail. In some cases, however, two or more SIC industries were

combined to form one NAICS industry, reducing the number of detailed industries

in that category.

The NAICS manual form at

The U.S. NAICS manual, North American Industry Classification System—

United States, 1997, scheduled to be released in late July 1998, will differ substantially from its predecessor, The Standard Industrial Classification Manual,

1987. The new manual, for example, includes a narrative definition of each industry, a list of illustrative economic activities used as criteria for classification

(index items), and a bulleted list of cross

references for similar activities classified

under other industry categories. Industries will only include illustrative examples and cross references when necessary. Another useful change from the

SIC system is that users will now be able

to search for cross references in the same

place for each definition. (See Exhibit 4

for an illustration of the new format, using NAICS industry 511210, Software

publishers, as an example.)

NAICS implementation

NAICS will require a significant effort to

implement. Large universe surveys such

as the BLS Covered Employment and

Wages (ES-202) program5 and the Census Bureau’s Economic Census6 will

have to assign new industry codes to the

more than 7 million business establishments in the United States. In addition,

during the transition period, SIC codes

also will need to be assigned to create

linkages between statistics classified under the two classification systems.

The ES-202 program will implement

NAICS over a 3-year period. Beginning

in 1998, establishments classified in SIC

industries that were not altered by the revision will be assigned NAICS codes by

computer. In 1999, establishments with

50 or more employees will be assigned

NAICS codes during the annual refile survey. (Currently assigned SIC codes for

these establishments will be verified at

that time as well.) In addition, one-half

of all establishments with fewer than 50

employees that are currently classified

in SIC industries that were split into two

or more parts will be surveyed and assigned NAICS codes. This phased-in approach will allow BLS to calculate estimates of the effects of NAICS by as early

as the end of fiscal year 1999. In 2000,

all remaining uncoded establishments

will be assigned NAICS codes.

The timing of implementation for surveys such as the ES-202 and the Economic Census is critical to many other

statistical programs that draw their

samples from the universe files maintained for these comprehensive surveys.

Sample-based programs cannot convert

to NAICS until the universe frames on

which they are based have been revised.

Programs that use data from the universe

and from sample programs will be the last

to implement NAICS. The Producer Price

Index (PPI), for example, uses BLS universe data for its sampling frame, data

from the Economic Census for its structure weights, and other data produced by

the Department of Commerce for its net

output calculations. As a result, the conversion of the PPI to NAICS cannot be fully

implemented until these programs have

converted to the new system.

BLS currently is training staff persons

at the regional offices and cooperating

State agencies—those who will actually

assign NAICS codes to establishments for

the ES-202 program. Training for the regional office staff began in June 1998,

51 Information

511 Publishing industries

5111 Newspaper, book,

periodical, and database

publishers

51111 Newspaper publishers

51112 Periodical publishers

51113 Book publishers

51114 Database and directory

publishers

51119 Other publishers

511191 Greeting card publishers

511199 All other publishers

5112 Software publishers

51121 Software publishers

No comparable grouping

No comparable grouping

No comparable grouping

2711 Newspapers: publishing, or

publishing and printing

2721 Periodicals: publishing, or

publishing and printing

2731 Books: publishing, or

publishing and printing (part)

2741 Miscellaneous publishing

(part)

2771 Greeting cards (part)

2741 Miscellaneous publishing

(part)

7372 Prepackaged software (part)

Exhibit 3. Comparison of the information industry under NAICS

and SIC

NAICS

code Industry SIC

code Industry
Monthly Labor Review July 1998 47

Exhibit 4. The NAICS manual format

511210 Software Publishers

This industry comprises establishments primarily engaged in computer software publishing or publishing and reproduction. Establishments in this

industry carry out operations necessary for producing and distributing computer software, such as designing, providing documentation, assisting in installation, and providing support services to software purchasers. These establishments may design and publish or publish only.

Illustrative examples:

Applications software publishing

Database software publishing

Game software publishing

Spreadsheet software publishing

Utility software publishing

Cross references. Establishments primarily engaged in—

• Reselling packaged software—are classified in Sector 42, Wholesale Trade

or Sector 44-45, Retail Trade;

• Designing software to meet the needs of specific users—are classified in

U.S. Industry 541511, Custom Computer Programming Services; and

• Mass duplication of software—are classified in U.S. Industry 334611, Software Reproducing.

and the regional office personnel will

train the State coders within their regions

throughout the summer and early fall.

The training materials for BLS staff were

jointly developed by the Office of Employment and Unemployment Statistics

and the Office of Field Operations.

NAICS and data users

Although the implementation of NAICS

undoubtedly will benefit most data users, the transition period may be difficult. There will be breaks in many time

series, for example, that are based on the

SIC system. The availability of time series data is essential for trend analysis,

economic forecasting, and seasonal adjustment. In many cases, however, the

NAICS changes are so significant that reconstructing historical data based on the

new system will be difficult. For example,

the old SIC system had no category for

telecommunications resellers, and hence

very little data were available for this industry. Similarly, at the higher levels of

aggregation—such as the manufacturing

or services divisions—many economic

activities formerly classified in one division are now classified in another.

Another issue for data users involves

the transition period, when some data

will be based on the SIC and other data

will be based on NAICS. As previously

noted, most government and other statistical organizations will implement

NAICS over a multiyear period. The resulting lack of comparability will create

challenges for economic analysis. In sum,

the NAICS revision presents a tradeoff

between a new and improved classification system, which will help provide data

for many new industries that formerly

were not classified separately, and the

inevitable time series breaks that occur

whenever major revisions to classification systems or statistical programs are

implemented.

THE LONG TERM BENEFITS OF NAICS will far

outweigh the costs of implementing the

new system. Specific economic data for

many emerging industries soon will be

available. Ultimately, NAICS will help

researchers, policymakers, and other analysts to better understand the U.S. and

global economies and the activities that

generate economic growth.

Footnotes

1

 See Administration introduces new industry

classification system (Executive Office of the

President, Office of Management and Budget),

April 8, 1997. For more detailed information, see

the NAICS page (http://www.census.gov/epcd/

www/naics.html) at the official Bureau of the Census website (http://www.census.gov/), accessed

May 15, 1998. The new manual, North American

Industry Classification System—United States,

1997, is currently scheduled to be released in late

July 1998 and may be ordered from the National

Technical Information Service, 5285 Port Royal

Road, Springfield, VA 22161. 2

 From 1938 to 1945, classification was based

on the Social Security Board Classification

Manual. In 1945, the basis was changed to the

Standard Industrial Classification Manual, which

has been used, with several revisions, ever since.

See BLS Handbook of Methods, Bulletin 2490 (Bureau of Labor Statistics, April 1997), p. 44, for a

brief explanation and history of the current classification system. 3

 See the NAICS page at the Bureau of the Census website for copies of the Federal Register

notices and other background on the new classification system. 4

 See International Standard Industrial Classification of All Economic Activities, 3rd rev. ed.

(New York, United Nations Publications, 1990). 5

 For more information on the Covered Employment and Wages program, see BLS Handbook

of Methods, Bulletin 2490 (Bureau of Labor Statistics, April 1997), pp. 42–47. 6

 For more information on this survey, see the

Economic Census page (http://www.census.gov/

epcd/www/econ97.html) within the Bureau of the

Census website.