1. Implementing a Major Revision to the Industry Classification System
18th International Roundtable on Business Survey Frames Beijing, China 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

2. 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

3. SIC Versus NAICS

4. 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

5. 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

6. 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

7. 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

8. 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

9. Bridge SIC Illustration

10. 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: (available early 1999)
Social Security Administration: 1999
Bureau of Labor Statistics: – 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 1997 Economic Census Data Products
Note: Data are shown for selected industries used in the paper’s illustrations.

22. 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.

23. 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.

24. 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

25. Time series (cont.)
Example of the problem

26. 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

27. 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)

28. 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

29. 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