Monthly Labor Review December 2001 15

 Implementing NAICS at BLS

Implementing the North American

Industry Classification System at BLS

This new classification system

is a more viable way of classifying industries

and tracking new businesses and changes

in economic activity; however, the transition period

may be challenging to both data collectors and data users

Recent years have brought many changes

in the U.S. economy. The rapid development of telecommunications and the

Internet are only two examples of an incredible

continuing evolution and progressively changing business environment. Correspondingly,

economists and statisticians are improving their

tools for measuring the economy. One basic tool

is the classification of businesses by industry.

Since the 1930s, government statistical programs

have published industry data based on the Standard Industrial Classification (SIC) system. Now,

these government programs will provide industry

statistics based on the North American Industry

Classification System (NAICS).1

The SIC system, originally designed in the

1930s, has been revised and updated periodically

to reflect changes in the U.S. economy. The last

revision was in 1987 when a number of new industries such as computer and software stores, video

tape rental stores, and plastic bottle manufacturers were added.2

 However, the SIC system still focuses on the manufacturing sector of the

economy, and provides insufficient detail for the

now dominant service sector. Newly developed

industries in information services, health care delivery, and even high-tech manufacturing cannot

be adequately studied under the SIC system because they are not separately identified at the industry level. Thus, a new system has been developed that captures the dynamism of the 21st century economy and changes as industry activity

develops. The Office of Management and Budget

James A. Walker

and

John B. Murphy

James A. Walker is

an economist in

the Office of

Employment and

Unemployment

Statistics, Bureau of

Labor Statistics.

e-mail:

Walker_J@bls.gov

John B. Murphy is

Assistant Division

Chief for Classification Activities,

Bureau of the

Census, and chair

of the Economic

Classification

Policy Committee.

e-mail:

John.Burns.Murphy@

census.gov

(OMB) announced adoption of NAICS in 1997,3 and in

2001, announced a revised NAICS for 2002.4 This article discusses the changes to NAICS as reflected in

the NAICS 2002 manual. It also profiles NAICS—discussing its structure, issues confronting data users

and collectors, and the implementation schedule for

programs at the Bureau of Labor Statistics. A companion article on pages 22–31 provides a first look at

employment and wage data based on NAICS.

5

The NAICS advantage

NAICS has many advantages over the SIC system.

First, it includes new and emerging industries that

did not exist when the SIC was developed. These

new industries are reflective of the Internet and communications age and the businesses that support

them, as well as the changing ways in how we work,

shop, and play. New industries such as semiconductor and related device manufacturing, cellular

and other wireless telecommunications, satellite

telecommunications, and Internet publishing and

broadcasting are important for understanding the

effects of these industries on the future direction of

our economy. Also, telemarketing bureaus and temporary help supply services reflect the changing way

of organizing work. The effect of the aging population on the economy is shown in the new industry

continuing care retirement communities. NAICS

separates convenience stores and warehouse clubs

into distinct industries, reflecting shifts in retailing

strategies and the shopping habits of consumers.

The addition of industries such as casinos, casino

Elderly
16 Monthly Labor Review December 2001

Implementing NAICS at BLS

hotels, and bed and breakfast inns mirrors changes in how

we spend leisure time and disposable income. Together,

these and other new industries will track developments in the

ever-changing economy.

Second, NAICS uses a unified concept to define industries.

The former SIC system used a mixture of ways to categorize

economic activity—some categories were based on demand

groupings (that is, activities that were similar in the eyes of

customers or users of the product or service); others were

based more on supply groupings. Under NAICS, 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.

Third, NAICS is used by the United States, as well as by

Canada and Mexico, thus giving a consistent tool for measuring and comparing the economies of these three partners in

the North American Free Trade Agreement (NAFTA). Consequently, bridge tables or crosswalks no longer are needed to

compare sectors across national boundaries.

Structure of NAICS

While NAICS uses a hierarchical structure much like that of the

existing SIC, there are a number of important differences. For

example, NAICS uses a six-digit classification code that allows

greater flexibility in the coding structure; the SIC is 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 20 such two-digit industry

sectors. By contrast, the SIC has only 11 divisions, designated by letters of the alphabet. NAICS has no sector for unclassified establishments; SIC has one division that includes

nonclassifiable establishments. The following is a comparison of terminology between the two systems (see exhibit 1 for

a full list of NAICS sectors and SIC divisions):

 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 Industry (four-digit)

 (five-digit)

 National industry (six-digit)

The first two digits in NAICS identify the sector. Three NAICS

sectors include more than one 2-digit identifiers. Manufacturing includes codes 31–33, Retail trade comprises 44–45,

and Transportation and warehousing encompasses 48–49.

The third digit of a NAICS code represents the subsector.

Using the information sector (sector 51) as an example, there

are seven separate subsectors:

51 Information

511 Publishing industries (except Internet);

512 Motion picture and sound recording industries;

515 Broadcasting (except Internet);

516 Internet publishing and broadcasting;

517 Telecommunications;

518 Internet service providers, web search portals and

data processing;

519 Other information services.

 Exhibit 1. Comparison of the structure NAICS and SIC

NAICS SIC

 sector division

1 1 Agriculture, forestry, fishing, and hunting A Agriculture, forestry, and fishing

21 Mining B Mining

22 Utilities C Construction

23 Construction D Manufacturing

31–33 Manufacturing E Transportation, communications, electric, gas, and sanitary

42 Wholesale trade services

44–45 Retail trade

48–49 Transportation and warehousing F Wholesale trade

51 Information G Retail trade

52 Finance and insurance H Finance, insurance, and real estate

53 Real estate and rental and leasing

54 Professional and technical services I Services

55 Management of companies and enterprises J Public administration

56 Administrative and waste services K Nonclassifiable establishments

61 Educational services

62 Healthcare and social assistance

71 Arts, entertainment, and recreation

72 Accommodation and food services

81 Other services, except public administration

92 Public administration

NAICS titles SIC titles
Monthly Labor Review December 2001 17

The fourth digit of the NAICS code represents the industry group

level. Under the publishing industries (except Internet)

subsector, for example, there are two industry groups:

5111 Newspaper, book, and directory publishers;

5112 Software publishers.

The fifth digit in the NAICS code represents the international industry level. Continuing with the same example, there

are 30 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 fivedigit level.

The sixth digit designates national detail. This allows the

flexibility to create more indepth statistics for the industries

that hold particular importance in each country. Most six-digit

industries end in a zero, thus signifying that there is no additional detail below the five digits. However, some six-digit

industries end in a number other than zero, meaning that the

fifth digit was split into two or more U.S. industries. For example, in the United States, the five-digit international industry 51811 Internet service providers and web search portals

has been split into two six-digit industries: 518111 Internet

service providers and 518112 web search portals. Data now

are available for these Internet businesses separately under

NAICS; this was not possible under the SIC. Thus, of the 30

international industries within the information sector, 12 have

splits below the five-digit level. As a result, the U.S. NAICS

manual contains a total of 36 six-digit national industries in

the information sector. (Exhibit 2 shows the NAICS six-digit

national industry structure for the information sector.)

When the national detail is the same in more than one

country, the same six-digit code is used in each country’s

national version of NAICS. The six-digit system allows for

greater data comparability among the three NAFTA partners

than does a four- or five-digit system. There had been significant differences in the former classification systems used by

the NAFTA partners; NAICS creates a standard system to be

used by each trading partner.

Other key differences. Data users should be aware of a few

key differences between the SIC and NAICS. There is no relationship between the numeric industry codes used in the SIC

and those used in NAICS. (See exhibit 3.) Each system is

separate and distinct. For instance, the auxiliary establishments are treated differently between the two systems. Auxiliaries are establishments primarily engaged in performing

management or support services for other establishments of

the same enterprise. These support services are not intended

for outside use. The SIC deals with auxiliary establishments

by assigning them the industry code of the parent company

that the establishment supports.6

 For instance, a headquarters for an automobile manufacturing company would be

coded as SIC 3711 motor vehicles and passenger car bodies,

even though employees in that office undertake planning

and decisionmaking roles in the company. As a result, the

employment and wages of the headquarters are included in

the statistics gathered on that parent company. The idea

under SIC is that auxiliaries such as a headquarters generally

draw resources from a parent company and thus should be

included in the costs of doing business. In other words, all

inputs in the business should be counted together in the

same industry.

In contrast, NAICS classifies establishments based on what

they actually do. Therefore, businesses, organizations, and institutions are given the industry code of their main activity without regard to the parent company. As a result, the automobile

NAICS national industry structure for the

information sector

Code Industry

511110 Newspaper publishers

511120 Periodical publishers

511130 Book publishers

511140 Directory and mailing list publishers

511191 Greeting card publishers

511199 All other publishers

511210 Software publishers

512110 Motion picture and video production

512120 Motion picture and video distribution

512131 Motion picture theaters, except drive-ins

512132 Drive-in motion picture theaters

512191 Teleproduction and postproduction services

512199 Other motion picture and video industries

512210 Record production

512220 Integrated record production and distribution

512230 Music publishers

512240 Sound recording studios

512290 Other sound recording industries

515111 Radio networks

515112 Radio stations

515120 Television broadcasting

515210 Cable and other subscription programming

516110 Internet publishing and broadcasting

517110 Wired telecommunications carriers

517211 Paging

517212 Cellular and other wireless carriers

517310 Telecommunications resellers

517410 Satellite telecommunications

517510 Cable and other program distribution

517910 Other telecommunications

518111 Internet service providers

518112 Web search portals

518210 Data processing and related services

519110 News syndicates

519120 Libraries and archives

519190 All other information services

Exhibit 2.
18 Monthly Labor Review December 2001

Implementing NAICS at BLS

headquarters mentioned in the previous example would be assigned NAICS 551114 corporate, subsidiary, and regional managing offices. Headquarters (except Government establishments) are included in this NAICS industry. This is consistent

with the principles of NAICS that establishments should be

grouped together based on their production processes.7

There will be a reduction in employment reported for industries in which headquarters are reported as separate establishments. As a result, employment and wage data for

manufacturing industries may be lower under NAICS than under the SIC because of this shift out of manufacturing into

NAICS 551114. This treatment also poses a challenge for data

collectors because they must be sure to separately identify

locations that are strictly headquarters from other locations

that conduct business as well as manage the operation at the

same location.

Another difference between the SIC and NAICS is in the

number of industries. The SIC system has 1,004 detailed industries (excluding the one for nonclassifiable establishments); NAICS has 1,179. In some instances a SIC was broken

into different NAICS industries creating more industry level

detail. Likewise, some SIC codes were combined into one

NAICS code, thus collapsing previous differentiation. As a

result, the introduction of six-digit NAICS codes does not necessarily mean that there is a corresponding increase in the

level of detail in the entire national structure.

The Bureau of Labor Statistics will provide further industry detail in NAICS by adding 19 industries in subsector 238

specialty trade contractors. These additional industries will

provide data about residential and nonresidential contractors.

Some of the new industries will include residential and nonresidential roofing contractors, and residential and nonresidential electrical contractors.

Ongoing revisions

Just as the SIC system was revised periodically, NAICS also

will require revisions to reflect the dynamic changes occurring in the economy. In fact, NAICS has already experienced

changes. The original version is referred to as NAICS 1997.

However, since that manual was published, the three NAFTA

countries have extended agreement in the construction sector to five digits in all areas, except 238 specialty trade contractors. This subsector is now comparable with Canada

and Mexico at the four-digit level. In NAICS 1997, construction had only been comparable at the two-digit sector level.

The NAICS 2002 manual also recognizes important changes in

the information sector. New industries have been added for

Internet publishing and broadcasting, in addition to Internet

service providers, and web search portals mentioned earlier.

For NAICS 2002, the three NAFTA countries were unable to

Comparison of the information industry under NAICS and SIC

NAICS industry SIC code SIC industry code

51 Information No comparable grouping

511 Publishing industries, except Internet No comparable grouping

5111 Newspaper, book, and directory publishers No comparable grouping

51111 Newspaper publishers

511110 Newspaper publishers 2711 Newspapers: publishing, or publishing and printing (part)

51112 Periodical publishers

511120 Periodical publishers 2721 Periodicals: publishing or publishing and printing (part)

2741 Miscellaneous publishing (part)

51113 Book publishers

511130 Book publishers 2731 Books: publishing, or publishing and printing (part)

2741 Miscellaneous publishing (part)

51114 Directory and mailing list publishers

511140 Directory and mailing list publishers 2741 Miscellaneous publishing (part)

7331 Direct mail advertising services (part)

51119 Other publishers

511191 Greeting card publishers 2771 Greeting cards (part)

511199 All other publishers 2741 Miscellaneous publishing (part)

5112 Software publishers

51121 Software publishers

511210 Software publishers 7372 Prepackaged software (part)

Exhibit 3.

NAICS
Monthly Labor Review December 2001 19

come to agreement below the two-digit sector in wholesale

trade, but the United States has included two new industries

in its classification system to reflect the importance of wholesale trade activities on the U.S. economy. One industry added

is business to business electronic markets, the other is

wholesale trade agents and brokers. Some industries in

retail trade have been further broken out in the NAICS 2002

manual. The NAICS 1997 manual grouped department stores

together, regardless if they were department stores or discount department stores. NAICS 2002 now makes this distinction as well as separating establishments that had been

classified as electronic shopping and mail order houses.

This industry now is classified as three distinct industries:

electronic shopping, electronic auctions, and mail-order

houses. The other NAICS sectors were untouched.

The Bureau of Labor Statistics will convert its programs

directly from SIC to NAICS 2002. Bypassing NAICS 1997 will

reduce the confusion to data users of multiple series breaks

over a very short period.

As was the SIC system, NAICS will be reviewed periodically,

and OMB will determine whether a significant revision is

needed. Future revisions may focus on reaching comparability in areas of the classification system that are not agreed

upon at the five-digit level. Regardless, small modifications

and interpretations will be studied and implemented on a continuous basis.

Implementation at BLS

NAICS requires a significant effort to implement. Large universe programs such as the BLS Covered Employment and

Wages (ES-202) program assigned new industry codes to the

approximately 8 million business establishments in the United

States.8 NAICS codes were assigned over a 4-year period beginning in 1998. That work is now finished, and the data can

be examined.9

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

each converted to the new classification system. (The timetable

for BLS conversion to NAICS is shown in exhibit 4.)

Some BLS programs will use a higher level of aggregation

in the publication of NAICS data. This alternative aggregation

structure allows for easier presentation of data in news releases and reduces the need to suppress information because

of confidentiality rules. The alternative aggregation contains

two groupings with 12 ‘supersectors,’ instead of the 20 NAICS

sectors. The first grouping in the aggregation is goods producing. It contains three supersectors: natural resources and

mining, construction, and manufacturing. The second grouping is service providing. It includes the remaining nine

supersectors: trade, transportation, and utilities; information; financial activities; professional and business services;

education and health services; leisure and hospitality; other

services; public administration; and unclassified.

This NAICS alternative aggregation structure has been reviewed by the Office of Management and Budget and is recognized by the Economic Classification Policy Committee.

Programs at the Bureau of Labor Statistics will use it whenever publication of the full 20 NAICS sectors is impossible.

Issues facing data users

Although the implementation of NAICS will undoubtedly benefit most data users, the transition period is likely to pose

some challenges. There will be breaks in many time series 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 several years.) The resulting lack of comparability will

challenge economic analysts. Also, agencies may implement

different versions of NAICS. BLS, as stated above, is moving

directly from SIC to NAICS 2002 over a 4-year period. The

Bureau of Census conducted the 1997 Economic Census using NAICS 1997 and will use NAICS 2002 in the 2002 Economic

Census. The Bureau of Economic Analysis (BEA) combines

data from several sources to create other series such as the

national accounts and gross domestic product. BEA, like many

other users, will have to understand each of the NAICS versions to fully and accurately reflect the differences among

SIC, NAICS 1997, and NAICS 2002. Further updates to NAICS

will be studied periodically and new industries may be added

in order to measure emerging industries.

Reconstructing historical data

During the transition, it may be difficult for some data users

to appreciate the potential benefits of NAICS. BLS recognizes
20 Monthly Labor Review December 2001

Implementing NAICS at BLS

the needs of the users for historical data to construct time

series, and is investigating approaches for doing so in some

programs.

In the Covered Employment and Wage program (commonly

known as ES-202), it may be possible to reconstruct up to 10

years of NAICS-based data. At a minimum, BLS plans to create

a set of SIC/NAICS employment ratio tables that can also be

used to reconstruct macro level employment time series.

These percentage relationships would be applied to existing

employment series to derive a possible replacement series.

The Current Employment Statistics (CES) program that provides monthly payroll employment will reconstruct time series for NAICS-based employment data for the Nation, States,

and areas. The national CES series for total nonfarm employment, as well as NAICS supersectors, will be available back to

1939. Start dates for finer levels of industry detail will be variable, dependent on the current start date of the series and the

extent of the SIC-to-NAICS series breaks. State and area data

will be available for total nonfarm employment also back to

1939. However, supersector employment data will only be

published back to January 1990, as will employment data for

finer levels of detail.

CES data series on hours, earnings, production workers,

and women workers will be reconstructed back to their current start dates for the national CES total private and

supersector series. No historical reconstruction will be done

for these data types for State and area data series.

One of the challenges of developing historical data is ensuring that relatively new industries do not appear before

they actually started. (For instance, electronic shopping on

the Internet was not possible until recently.) As data series

are developed, they will be reviewed for obvious historical

inaccuracies.

Productivity data. The complexity of converting to NAICS

is shown in another BLS program. For the industry productivity program, the current plans are to publish in late fall of 2003

time series (indexes) of output per hour for industries, converted to a NAICS basis. The timing of this conversion is guided

by the availability of historical employment and hours on a

NAICS basis and on the conversion of historical output series

to a NAICS basis. Industry unit labor cost and multifactor

productivity series will be converted to a NAICS basis at a later

date. For all presently developed industry productivity series, conversion to a NAICS basis will begin with 1992 or earlier

data. Eventually all series will be converted beginning with

1987 data, or the initial year of the series if that year is later

than 1987.

 Exhibit 4. Timetable for implementing NAICS at the Bureau of Labor Statistics

Office of Employment and Unemployment Statistics:

Current Employment Statistics .......................................................... May 2003 June 2003

Mass Layoff Statistics ......................................................................... January 2002 March 2002

Current Population Survey ................................................................. January 2003 February 2003

Occupational Employment Statistics ................................................ 2002, fourth quarter January 2004

Covered Employment and Wages ...................................................... 2001 Fall 2002

Job Openings and Labor Turnover Survey1 ................................................................. To be announced To be announced

Office of Employment Projections: ............................................ 2004–14 November 2005

...............................................................................................................

Office of Productivity and Technology: ....................................

Productivity measures for selected industries ................................... 2001 2003, fourth quarter

Foreign Labor Statistics....................................................................... 2003 Late 2004

Office of Compensation and Working Conditions .................

National Compensation Survey— .....................................................

Employment Cost Index ................................................................. March 2005 April 2005

Employer Costs for Employee Compensation ............................ March 2005 June 2005

Locality wage levels ........................................................................ Spring 2005 Spring 2005

National and census division publications ..................................... 2004 Spring 2005

Integrated benefit provision product ............................................. 2004 Spring 2005

Occupational Safety and Health Statistics— ....................................

Survey of Occupational Injuries and illnesses ............................... 2003 December 2004

Census of Fatal Occupational Injuries ........................................... 2003 August 2004

Office of Prices and Living Conditions: ....................................

Producer Price Indexes ........................................................................ January 2004 February 2004

Conversion

Office or program reference period Publication date

1 Job Openings and Labor Turnover Survey (JOLTS) is currently under development. First release of information, in early 2002, will be SIC based.

NOTE: This timetable is current as of December 2001, but is subject to

change.
Monthly Labor Review December 2001 21

Labor productivity is the ratio of the amount of goods and

services (output) to total hours of labor worked. The conversion of industry productivity series to a NAICS basis involves

converting both the output and hours series. The output

measures for many industry series will be converted using

data at or below the four-digit SIC level (six-digit NAICS level).

The hours worked and compensation series will be converted

at the four-digit SIC to six-digit NAICS level using the historically revised data being developed by the Current Employment Statistics program of the Bureau of Labor Statistics

Manufacturing output measures are developed, most often, from five-digit SIC (seven-digit NAICS) product class data.

The product class data are aggregated according to a

Tornqvist index formula to an industry output index. More

than half of the product classes are direct matches between

SIC and NAICS. For product classes that are not direct

matches, an algorithm has been developed to estimate the

SIC product class data from NAICS product class data and

vice versa.

Retail trade output series are developed from revenue data

classified by merchandise line sales for each industry. The deflated merchandise line sales for each industry are aggregated

according to a Tornqvist index formula to compute the industry

output index. For those retail industries that are not exact

matches, conversion of the output series from a SIC to NAICS

basis will be accomplished by adjusting the amount of revenue

of merchandise line sales per industry and aggregating.

The output series for utilities, communications, transportation, and service industries that are not exact matches between SIC and NAICS will be adjusted at the greatest amount

of detail possible. Specific methods have not been developed for each of the industries. With the exception of some

adjustments for copper mining and nonmetallic minerals,

there is a direct match between the SIC system and the NAICS

system for all mining industries for which the Bureau has

productivity measures. These industries will be assigned

the NAICS code.

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 economy of the United

States has changed significantly since data were first published using the SIC system. Even though the SIC has been

revised and updated periodically, its focus on manufacturing

does not provide sufficient detail for the dominant service

sector. Thus, the United States, along with Canada and

Mexico, developed NAICS, which captures these new and

emerging industries, uses a unified concept to define industries, and is a consistent and comparable tool for measuring

the economies of the three NAFTA trading partners. Converting to NAICS may be difficult—the conversion will not be

simple for agencies or data users. However, BLS and other

agencies will facilitate this move wherever possible. In the

long term, NAICS will prove to be a viable and more accurate

way of classifying and measuring economic activity. 

Notes

1 See North American Industry Classification System—United States,

1997 (Executive Office of the President, Office of Management and

Budget).

2 See Standard Industrial Classification Manual 1987 (Executive

Office of the President, Office of Management and Budget).

3

 See Administration introduces new industry classification system

(Executive Office of the President, Office of Management and Budget,

April 8, 1997). For a Bureau of Labor Statistics perspective on NAICS,

see John B. Murphy, “Introducing the North American Industry Classification System,” Monthly Labor Review, July 1998, pp. 43–47.

4

 See North American Industry Classification System—Revision for

2002 (Executive Office of the President, Office of Management and

Budget). The new manual will be released by spring 2002 and may be

ordered from the National Technical Information Service, 5285 Port

Royal Road, Springfield, VA 22161

5

 See David R. H. Hiles, “A first look at employment and wages

using NAICS,” this issue, pages 22–31.

6

 See Standard Industrial Classification Manual 1987.

7 See North American Industry Classification System—United States,

1997, p. 11.

8

 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.

9

 Hiles, “A first look at employment and wages.”