Employment and Training Administration
Washington, D. C. 20210






September 20, 1996




September 30, 1997











Unemployment Insurance Service




The North American Industry Classification System (NAICS) to Replace the Standard Industrial Classification (SIC) System Background



The North American Industry Classification System (NAICS) is being developed by cooperative agreement among Canada, Mexico, and the United States. It is intended to replace the current Standard Industrial Classification (SIC) system as the primary tool to collect establishment level data. The Office of Management and Budget and the Department of Commerce are both involved in this initiative which was published for comment in the Federal Register on July 5, 1996.

In developing NAICS, the three countries have agreed that the new structure would adhere to the following principles:

  1. NAICS will be built on a production based conceptual framework. Production units that use identical or similar production processes will be grouped together.

  2. Special attention will be given to new and emerging industries, service industries in general, and industries engaged in production of advanced technologies.

  3. Time series continuity will be maintained whenever possible. However; changes in the economy and establishing comparability among Canada, Mexico, and the United States' classifications will have priority.

  4. The NAICS system will attempt to be comparable with revision 3 of the International Standard Industrial Classification system at the two digit level.

Scope of the Revision

An analysis of the revision by number of affected industry classifications reveals that the NAICS has 1,160 industries, grouped in 21 sectors, as compared to 1,005 industries grouped in nine major divisions, in the 1987 SIC system. Of these 1,005 industries in the 1987 SIC, 661 industries will be a direct match (one-to-one), while 344 industries will be split (one-to-many). Within these 344 industries, approximately 3,575,000 units, with employment of 55,526,000, will be affected.

In addition to the changes in industry definitions, 511 industries will have potential time-series breaks. Of this number, at least 256 industries will experience breaks of three percent or more of the units classified.

Change in Coding From Four Digits to Six Digits

NAICS is organized in a hierarchical structure much like the existing SIC system. However, the current four digit structure used in the SIC system will be replaced with a six digit structure. All units covered by State UI laws will have to be reclassified to the new structure.

The first two digits in the NAICS industry code structure will represent the "Industry Sector". The third digit will represent the "Industry Subsector", and the fourth digit will represent the "Industry Group". The fifth digit will represent "Industry". The sixth digit in the NAICS code was designated as "country specific" and represents important economic industries particular to the United States.

Status of Auxiliary Codes

Under the current SIC system, auxiliaries are defined as establishments primarily engaged in performing management or support services for other establishments of the same enterprise. Auxiliary units, such as central administrative offices, research and development laboratories, and warehouses, are currently assigned the industry classification of the establishments they serve, in addition to .a single-digit auxiliary code. Some States are presently collecting auxiliary unit information on their New Employer Registration (Status) forms.

One NAICS proposal would require auxiliary units engaged in management and support services to be assigned the industry classification of the economic activity that they, themselves, are engaged in, along with a code identifying them as an auxiliary establishment. For instance, service support units are currently assigned the four-digit industry classification of the units they serve, such as manufacturing or construction, in addition to the auxiliary code. Under NAICS, these service support activities will shift out of these "Divisions" and be reclassified, according to their actual economic activities in the "Services Sectors".

BLS Implementation Plan

Within the Bureau of Labor Statistics (BLS) Covered Employment and Wages (ES-202) program, plans are being made to phase in the implementation of NAICS over a three year period beginning in FY 1998. However, some activities, such as system updates, survey vehicle design, OMB approval, and NAICS training will begin in FY 1997.

During each of FY 1998, FY 1999, and FY 2000, the BLS implementation plan calls for: (1) surveying approximately 1.2 million establishments in the one-to-many industry split category; (2) conducting intensive NAICS training; and, (3) assigning both SIC and NAICS codes to these establishments. In FY 1998, the 3.5 million establishments with a one-to-one SIC to NAICS match will be. directly coded using automated software. BLS, working in conjunction with the Ohio SESA, plans to introduce "AutoNAICS", an automated interactive NAICS assignment software in FY 1999.

For the first quarter 2000, seven million establishments on the State ES-202 micro data files will be dual coded. These files are due to BLS from the States in August 2000. Beginning with the second quarter 2000 data, the 1987 SIC codes will be maintained on the ES-202 files, but not updated. Only NAICS codes will be updated on an annual basis.

BLS Training for State LMI Staff

NAICS training will be very critical to the implementation. To help States, BLS will prepare tables showing the changes made to the industry classifications, and provide crosswalks between the 1987 SIC system and the 1997 NAICS. Detailed descriptions explaining the changes to the split industries will also be prepared and distributed to the State agencies.

An initial overview training class, explaining NAICS, will be available in June 1997. During the revision period, a more intensive training will be provided. All BLS training materials will be made available to UI staff responsible for assigning the initial status determination coding.

ETA Issues

  1. Changes in Initial UI Status Determination Forms

    Many States will be required to amend their UI status determination forms to: (1) facilitate dual code assignment of 1987 SIC and NAICS codes until the second quarter 2000, (2) identify "sectors" rather than "industries", (3) obtain enough economic information from the employers to assign a 6-digit NAICS code, and (4) be capable of identifying auxiliary units.

  2. Affect on Initial UI Tax Rates

    A number of States use the industrial classifications to set initial UI tax rates. There will be major changes in the manner that support services are classified, if auxiliaries are classified according to their actual activity rather than the establishment that they are serving. Support establishments will move out of Divisions such as Mining, Construction, Manufacturing, Transportation, Communications, Electric, Gas, and Sanitary Services and into the Services Sectors, which generally have lower initial unemployment insurance tax rates.

    In addition to the potential impact of auxiliaries, some industrial activities will move from one division in the 1987 SIC system to a completely different sector in the NAICS. One major shift will move land subdividers and developers from Finance, Insurance, and Real Estate into Construction. Another shift will move establishments that install burglar and fire alarm systems from Construction to the new NAICS industry, Security Systems Services. In many States, this SIC/NAICS movement between industries, especially in Construction, will affect how tax rates are set for newly covered employers.

  3. Modification of Computer Systems

Modification to State UI systems to accommodate the new six digit NAICS codes is of utmost importance. Currently, UI industrial classification is updated on an annual basis from the refiling surveys conducted by the ES-202 staff in the SESAs. As noted above, BLS will begin collecting this information during FY 1998. The advantage of having the six digit NAICS field on State UI files as early as January 1998, is that all "new" establishments can be dual coded immediately. Moreover, some States may wish to maintain a dual system of both the four and six digit codes to allow for research of tax rate effects as the new system is phased in. However, the absolute last quarter for having the six digit code on the system is the first quarter of the year 2000.