Implementing a Major Revision to the Industry Classification System 18th International Roundtable on Business Survey Frames Beijing, China 17 - 22 October 2004 Session 4 — Classification Issues Implementing a Major Revision to the Industry Classification System Ron S. Jarmin and Edward D. Walker United States Census Bureau

North American Industry Classification System—1997 Background North American partners Canada, Mexico, and the U.S. developed NAICS collaboratively NAICS provides 3-country comparability for industries The U.S. adopted NAICS in 1997 NAICS is a major structural and conceptual departure from its U.S. predecessor, the Standard Industrial Classification (SIC) The Census Bureau’s Business Register implemented NAICS in 1997

SIC Versus NAICS

SIC versus NAICS Characteristic SIC 1987 NAICS 1997 No Yes Classification based on a consistent economic concept No Ad hoc mix of production- and market-oriented industries Yes Production processes Codes Alphabetic divisions, A–J 2-digit major groups 3-digit industry groups 4-digit industries 6-digit processing codes 2-digit sectors 3-digit subsectors 4-digit industry groups 5-digit NAICS industries 6-digit National industries 8-digit processing codes Structure 10 Divisions 20 Sectors (Disaggregation and reorganization for services-producing industries) Industries 1,004 total 1,170 U.S. industries, total Net gain of 166 industries 358 industries defined separately for the first time (70% in services) 300 industries revised substantially SIC versus NAICS

SIC versus NAICS SIC/NAICS Relationships 614 SIC industries each go to a single NAICS industry 390 SIC industries consist of 2 subindustry parts or more that go to different NAICS industries (1,357 such subindustry parts, total) 80 SIC industries consist of 2 subindustry parts or more that go to NAICS industries in different sectors 401 NAICS industries consist of 2 subindustry parts or more that come from different SIC industries Overall, relationships may be 1:1, 1:many, many:1, or many:many

NAICS Implementation The Census Bureau’s Goals Complete transition for the 1997 reference period Make implementation as complete and accurate as possible Keep additional cost to a minimum Keep additional response burden to a minimum Provide statistical presentations that ease the transition for data users

NAICS Implementation The Census Bureau’s Strategies Use 1997 Economic Census as the implementation vehicle Our most comprehensive, broad-based economic collection Tightly integrated with the Business Register, which the census updates Rich variety of specialized content for assigning industry codes Extensive, detailed industry statistics that are optimal for introducing the new classification system

NAICS Implementation The Census Bureau’s Strategies—Continued Classify establishments according to both NAICS and SIC for the 1997 reference period Requirement for presenting 1997 data on both bases Additional subindustry detail NAICS components of SIC industries SIC components of NAICS industries Bridge SIC coding scheme SIC-based root (4 digits) Suffix (2 digits) captures additional subindustry detail Meets requirement for continued support of SIC-based surveys through 2001 Fits existing data structures and processing systems Translates to a distinct NAICS industry and a distinct SIC industry 1,971 industry/subindustry classes, total

Bridge SIC Illustration

Administrative Data Important source of data, including industry codes Business Register maintenance Economic census observations—i.e., for smaller single units excluded from direct collection NAICS implementation by suppliers Internal Revenue Service: 1998 (available early 1999) Social Security Administration: 1999 Bureau of Labor Statistics: 1997 – 2000 Methods varied Role in Census Bureau’s NAICS implementation Minor for 1997—too late (nonemployers an exception) Important for Business Register maintenance—1998 and later

1996 Refiling Collections Targeted establishments in 80 SIC Industries that had parts going to different NAICS Sectors Example: Metal Mining Services - Part to NAICS Sector 21—Mining - Part to NAICS Sector 54—Professional, Scientific, and Technical Services Important preparation for economic census collection 454 questionnaires tailored to fairly narrow industry groups Content varied markedly from sector to sector

1996 Refiling Collections Single Units Special survey Questionnaire December 1996 mailing March 1997 follow-up Questionnaire 1 page 17 versions for groups of related industries Listed bridge SIC industry/ subindustry descriptions Respondent asked to select one description that best fit the business’ primary activity

1996 Refiling Collections Multiunits Done by means of the 1996 Company Organization Survey (COS) Sample modified to include companies with establishments in 80 industries targeted for refiling 50,698 enterprises with 1.1 million establishments, total 67,973 establishments targeted for refiling Presented inventory of establishments and requested updates to industry code and other items for each one

1996 Refiling Collections Multiunits—Continued Inventory list directed respondent to an industry coding insert 11 versions for groups of related industries Listed bridge SIC industry/ subindustry descriptions Respondent asked to select one description that best fit the business’ primary activity and recorded the code on the inventory list

1997 Economic Census Collections Standard Forms Sent to All multiunits Larger single units A sample of smaller single units 454 versions tailored to groups of related industries Content Basic economic measures: sales/receipts/revenue, payroll, employment, and other items that varied by sector Specialized items important for assigning bridge SIC codes—e.g., Detail of sales/receipts/revenue (by class) Kind of business (bridge SIC industry/subindustry descriptions) Materials consumed (by class) Selling characteristics Employees by occupation 3.4 million establishments

1997 Economic Census Collections Sector-Specific Classification Forms Sent to smaller, partially classified single units—1.2 million 28 versions tailored to groups of related industries Content Kind of business Bridge SIC industry/subindustry descriptions with check boxes Respondent asked to pick the one description that best fit the business’ primary activity Some versions had other classification inquiries—e.g., Method of selling Selling characteristics Retail trade and wholesale trade

1997 Economic Census Collections General Classification Form Sent to unclassified single units of any size—0.4 million Content Business or activity inquiry Bridge SIC industry/subindustry descriptions with check boxes Respondent asked to pick the one description that best fit the business’ primary activity Sources of sales, receipts, or revenue Materials consumed (manufacturers) Class of customer Once classified, larger single units were sent a standard form as described earlier

1997 Economic Census Classification Methods Industry coding edits Applied complex rules Considered a variety of classification data from standard forms Clerical coding Used industry coding procedures and reference material Primary uses: Classification form responses that required interpretation Referrals from industry coding edits Industry descriptions from nonemployers’ tax data Analytical coding Used industry expertise and reference material May have contacted respondent for clarification Difficult cases referred by clerical coding units Classification errors identified by macro-analytical review of data products

1997 Economic Census Classification Methods—Continued NAICS classifications from 1998 tax data—nonemployers only Statistical modeling procedure Parameters Based on subpopulation of establishments with a complete 6-digit bridge SIC Determined relative distribution of units from each 2-, 3-, 4-, or 6-digit bridge SIC to the corresponding set of 6-digit bridge SICs Method Assumed similar bridge SIC distributions for partially and completely classified establishments Preserved the distributions observed for completely classified establishments Used 3 uniformly distributed digits from the establishment’s EIN as a distribution index Assigned a 6-digit bridge SIC code to each establishment by referring its SIC and distribution index to the distribution parameters

1997 Economic Census Classification Methods—Continued Statistical Modeling Procedure Illustrations Procedure Identify the first row that matches on SIC code (in) Compare the establishment’s 3-digit index (based on EIN) to the cumulative distribution parameter If INDEX < PARAMETER, assign corresponding bridge SIC code (out) Else, advance to next row and repeat Step 2

1997 Economic Census Data Products Note: Data are shown for selected industries used in the paper’s illustrations.

1997 Economic Census Data Products Comparable NAICS/SIC NAICS Industry SIC 1987 Components Note: Data are shown for selected industries used in the paper’s illustrations.

1997 Economic Census Data Products Comparable SIC/NAICS SIC 1987 Industry NAICS Components Note: Data are shown for selected industries used in the paper’s illustrations.

Time Series Considerations The adoption of NAICS causes a disruption in industry level time series data used by policymakers and researchers Also affects the confidential micro data sets used at Census and its Research Data Centers

Time series (cont.) Example of the problem

Time series (cont.) Historical NAICS Classification Methodology Bayard and Klimek (2003) develop a method to recursively assign NAICS codes to historical Census of Manufactures data 4 ways to assign codes Product Code based assignment One to One SIC – NAICS mappings Longitudinal establishment linkages Statistical Model

Time series (cont.) Uses, status and next steps Methodology has been used to develop NAICS based time series data for Plant Capacity and Industrial Production Also used for Census Benchmarking exercise for Retail and Wholesale surveys Current plans to recode Longitudinal Business Database (i.e., all establishments in the Bureau’s business register going back to 1975)

Lessons Learned Minor discrepancies between final NAICS specification and census classifications Causes: NAICS refinements continued into early 1998 Detailed industry definitions Determining industry placement for 35,000 specific activities December 1997 census mailout required questionnaire content had to be made final during the first half of 1997 Result: Some industries published on an “as collected” basis Lessons: Expect last-minute changes As much as possible, allow industry classification system to stabilize before implementing it Be prepared to adapt to definitional uncertainty

Lessons Learned 1996 multiunit refiling produced low item response rate for reclassification inquiry Causes: Use of traditional collection instrument with minimal change Designed primarily for collecting company organization information Not optimal for collecting classification updates Classification insert did not work well Result: costly follow-up and supplementary classification activity Lesson: A better design was needed Data users will demand time series continuity