Introducing the North American Industry Classification System

By Murphy, John B. | Monthly Labor Review, July 1998 | Go to article overview
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Introducing the North American Industry Classification System


Murphy, John B., Monthly Labor Review


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.

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