Development of NAICS
The United States has a new industry classification system! On April 9, 1997,
the Office of Management and Budget (OMB) announced its decision to adopt
the North American Industry Classification System (NAICS pronounced Nakes)
as the industry classification system used by the statistical agencies of
the United States. NAICS replaces the 1987 Standard Industrial Classification
NAICS is a unique, all-new system for classifying business establishments.
It is the first economic classification system to be constructed based on
a single economic concept. Economic units that use like processes to produce
goods or services are grouped together. This "production-oriented" system
means that statistical agencies in the United States will produce data that
can be used for measuring productivity, unit labor costs, and the capital
intensity of production; constructing input-output relationships; and estimating
employment-output relationships and other such statistics that require that
inputs and outputs be used together.
NAICS is the first-ever North American industry classification system. The
system was developed by the Economic Classification Policy Committee (ECPC),
on behalf of the OMB, in cooperation with Statistics Canada and Mexico's
Instituto Nacional de Estadística, Geografía e Informática
(INEGI) to provide comparable statistics across the three countries. For
the first time, government and business analysts will be able to compare
directly industrial production statistics collected and published in the
three North American Free Trade Agreement countries. NAICS also provides
for increased comparability with the International Standard Industrial
Classification System (ISIC, Revision 3), developed and maintained by the
NAICS responds to increasing and serious criticism about the SIC. It reflects
the structure of today's economy in the United States, Canada, and Mexico,
including the emergence and growth of the service sector and new and advanced
technologies. It is a flexible system that allows each country to recognize
important industries below the level at which comparable data will be shown
for all three countries.
The recognition of NAICS United States as the official classification system
to be used by the U.S. statistical agencies is the culmination of a multi-year
review by the ECPC of economic classifications, business data users, and
future information needs. The publication in early 1999 of Economic Census
data based on NAICS will provide the first glimpse of data based on the new
DEVELOPMENT OF NAICS
The SIC, used since the 1930s, was developed by an Interdepartmental Committee
on Industrial Statistics, established by the Central Statistical Board of
the United States. Its charge was "to develop a plan of classification of
various types of statistical data by industries and to promote the general
adoption of such classification as the standard classification of the Federal
Government."(1) That List of Industries for
manufacturing, published in 1938, and the 1939 List of Industries for
nonmanufacturing industries, completed in 1939, became the first Standard
Industrial Classification (SIC) for the United States.
The SIC was established to promote uniformity and comparability of data collected
and published by agencies within the U.S. government, state agencies, trade
associations, and research organizations. It was developed as an establishment
based industry classification system that classified each establishment (defined
as a single physical location at which economic activity occurs) according
to its primary activity. The SIC covered the entire field of economic activities
by defining industries in accordance with the composition and structure of
Since the 1930s, the SIC has been revised periodically to reflect changes
in the economic structure of the United States. New industries were added
and small, declining industries deleted or combined with other activities.
However, the overall structure of the SIC remained essentially unchanged
since the 1930s. The SIC was last revised in 1987, when approximately 20
new service industries were added to the SIC and a few new industries were
added to manufacturing to reflect technological changes occurring in that
By the early 1990s, many data users and analysts were criticizing the SIC
as outmoded and not reflective of the economy of the United States. The adoption
of the North American Free Trade Agreement underscored the need not only
to develop a new system, but also to develop that system in cooperation with
Canada and Mexico. In early 1992, OMB established the ECPC, comprised of
representatives from the Bureau of Economic Analysis that chaired the committee,
the Bureau of the Census, and the Bureau of Labor Statistics, and charged
it with a "fresh slate" examination of economic classifications to determine
if a new system should be developed and whether or not that new system should
be based on an economic concept.
The ECPC began its work by developing issue papers for public comment about
economic classifications. Six issue papers were published by the ECPC. The
first, "Conceptual Issues" explored the need
to develop a new system on an economic concept. It detailed two frameworks
on which to base a new system, production-oriented or demand oriented, and
posed questions for the data user community. The second paper,
"Aggregation Structures and Hierarchies,"
looked at alternative approaches to structuring a classification system.
Issues Paper No. 3, "Collectibility of Data",
looks at practical issues relating to coding individual establishments into
industries, while Issues Paper No. 4, "Criteria
for Determining Industries," described statistical measures used in the
past to construct the SIC and possible future measures that might be used.
"The Impact of Classification Revisions on Time
Series" was Issues Paper No. 5. It described the trade-off between
maintaining time-series comparability and developing a new system that would
provide more relevant up-to-date economic information. Finally, Issues Paper
No. 6, "Services Classifications," looked
at the important issues surrounding developing a useful services industry
In past revisions of the SIC, international comparability with other
classification systems was not a top priority. Even though data produced
using the system created problems for analyses that sought to compare industrial
characteristics, trends, and developments across the economies of different
countries, little attention was paid to the systems in use internationally.
NAICS, however, is different. In a July
26, 1994 Federal Register notice, the ECPC announced that it had
reached agreement with the statistical agencies of Canada and Mexico to develop
a common industry classification system. The system would be based on a
production-oriented economic concept, focus on service industries and industries
engaged in the production of advanced technologies, and provide for comparable
industry classifications across the North American Free Trade Agreement
countries. In that same Federal Register the ECPC solicited proposals
for new industries from data users and in consultation with INEGI and Statistics
Canada developed NAICS.
The ECPC established seven interagency subcommittees representing twenty
Federal government agencies to create the new system in consultation with
U.S. data users and in cooperation with staff from the statistical agencies
of Canada and Mexico. These committees met with their Canadian and Mexican
counterparts over a three year period and reached agreement on the structure
of individual industries, industry groups, and subsectors. In all,
31 separate agreements were reached with
Statistics Canada and INEGI.
HOW IS NAICS DIFFERENT FROM THE SIC?
NAICS is based on a consistent, economic concept. Establishments that use
the same or similar processes to produce goods or services are grouped together.
The SIC, developed in the 1930s and revised periodically over the past 50
years, was not based on a consistent economic concept. Some industries are
demand based while others are production based.
NAICS recognizes the changing and growing services-based economy of the United
States and its North American neighbors. NAICS includes 1,170 industries
of which 565 are service-based industries. The SIC had 1,004 industries of
which 416 were service related industries. Three hundred and fifty eight
new industries are recognized in NAICS, 250 of which are services producing
industries. There are 20 sectors in NAICS of which 16 are services related.
The SIC had ten divisions of which five were service-related. A chart
in another article shows the relationship between
NAICS sectors and SIC Divisions.
NAICS provides for comparable statistics among the North American countries.
In addition, it provides for more comparable information with ISIC. The SIC
NAICS is a six-digit system that provides for comparability among the three
countries at the five-digit level, albeit with a few
exceptions(2). The SIC was a four-digit system
that was not linked in any way to the systems of Canada and Mexico. A six-digit
system was adopted for NAICS to provide for increased flexibility in the
system. NAICS allows each country to recognize activities that are important
in the respective countries, but may not be large enough or important enough
to recognize in all three countries. The sixth digit is reserved for this
The nomenclature of the groupings within the system is different in NAICS.
NAICS calls the highest level of aggregation in the system a sector; the
SIC referred to this grouping as a division. Other changes have been made
to the nomenclature as shown in Figure 2.
NAICS vs. SIC: Structure and Nomenclature
The introduction of NAICS as the industry classification system of the United
States will have a profound effect on statistics published by the statistical
agencies in the U.S. For the first time, data will be available on the
Information sector; service industries never before identified in the SIC
will be measured; and statistics published by the U.S. statistical agencies
will be on a consistent basis with industry data provided by Canada and Mexico's
statistical offices. NAICS is forward looking and flexible, anticipating
increasing globalization and providing enhanced industry comparability among
the NAFTA trading partners while recognizing important national industries
and providing for periodic updates through three country review. NAICS recognizes
the structural and technological changes occurring in the economies of the
three North American countries and provides the means to measure these changes
well into the next millennium.
NOTES AND REFERENCES
2. Typically, the level at which comparable data will be available for Canada, Mexico, and the United States is the five-digit NAICS industry; for some sectors (or subsectors or industry groups) however, the three countries agreed upon the boundaries at a higher level of detail rather than the detailed industry structure (five-digit). Agreement was reached at the sector level for construction; wholesale trade; retail trade; and public administration and at the subsector level for finance; personal and laundry services; religious, grantmaking, civic, and professional and similar organization; and waste management and remediation services. For insurance and real estate, the three countries agreed on comparability at the industry group level.
Differences in the economies of the three countries or time constraints necessitated these modifications. For each of these sectors, except wholesale trade and public administration, Canada and the United States agreed upon an industry structure and hierarchy to ensure comparability of statistics between those two countries. Canada and the United States also established the same national detail (six-digit) industries where possible, adopting the same codes to describe comparable industries. For this reason, the numbers of the U.S. national industries may not be consecutive. In a few cases, it was necessary for the United States to use all of the numbers available to establish its six-digit detail so that the same six-digit codes do not represent comparable industries in the U.S. and Canada. The NAICS United States manual, to be issued shortly, provides further information on the level of comparability among the three countries.
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