Introduction to the Industrial Classification System

Overview of the North American Industrial Classification System (NAICS) used for categorizing establishments.
Introduction to the Industrial Classification System - Articles

Updated: August 8, 2017

The industrial classification system is a basic framework for categorizing establishments, and serves as the basis for regional economic analysis. This system allows us to arrange the economy's multitude of business types into discrete industry classifications. Today, much of the readily available economic data related to employment is based on such classifications.

Much of the available employment data on regional economies summarizes (or aggregates) information that is collected from nearly all business establishments. An establishment is a statistical unit, which is the smallest operating entity for which records are maintained. Usually, establishments are a single location where operations are conducted, although an establishment may be the same as a business, there are many exceptions. For example a business may consist of more than one establishment.

The NAICS Code

The North American Industrial Classification System (NAICS), which is used by Canada, Mexico, and the United States. NAICS (pronounced "nakes") is a six-digit system.

NAICS was adopted in 1997 to replace the SIC (Standard Industry Classification) system to recognize the new range of services and technological changes that occurred since the most recent SIC update. In addition, NAICS was adapted to group industries using similar production processes. For example the NAICS includes an information sector that was lacking in the SIC.

Examples of industries in this sector include software publishing, database and directory publishing, satellite telecommunications, paging, cellular and other wireless telecommunications, on-line information, periodical publishing, motion picture and recording industries, and other information services.

The NAICS divides the economy into 20 major sectors and recognizes 1,170 industries. Five of the 20 sectors are largely goods-producing and 15 are entirely services-producing industries. Like the SIC, the NAICS is hierarchical. The NAICS identifies sectors and industries with two to six digits; the more digits, the more specific the industry identification (see Table 3).

Table 3. New NAICS Code Structure
NAICS CodeIndustry
11Agriculture, Forestry, and Fishing
21Mining
22Utilities
23Construction
31-33Manufacturing
41-43Wholesale Trade
44-46Retail Trade
48-49Transportation and Warehousing
51Information
52Finance and Insurance
53Real Estate and Rental and Leasing
54Professional, Scientific, and Technical Services
55Management of Companies and Enterprises
56Administrative and Support and Waste Management and Remediation Services
61Educational Services
62Health Care and Social Assistance
71Arts, Entertainment, and Recreation
72Accommodation and Food Services
81Other Service (except public administration)
91-93Public Administration

The NAICS code is set up as a hierarchy. Typically in comparative discussions of industries the NAICS codes can be used as two-, three-, four-, five-, and six-digit codes. Discussions about manufacturing in general use the two-digit manufacturing codes (31-33), but discussions about particular types of manufacturing use the three-digit subsector codes. The following tables give a couple of examples.

Table 4.1. NAICS Classification, Example 1
NAICS LevelNAICS CodeDescription
Sector31-33Manufacturing
Subsector334Computer and electronic product manufacturing
Industry Group3346Manufacturing and reproduction of magnetic and optical media
Industry33461Manufacturing and reproduction of magnetic and optical media
U.S. Industry334611Reproduction of software
Table 4.2. NAICS Classification, Example 2
NAICS LevelNAICS CodeDescription
Sector51Information
Subsector513Broadcasting and telecommunications
Industry Group5133Telecommunications
Industry51332Wireless telecommunications carriers, except satellite
U.S. Industry513321Paging

A Few Caveats

When using industrial classifications, you should keep a few important factors in mind.

  • First, individual establishments are assigned an industry according to their primary economic activity. Thus, if a business produces goods that fall under two or more industries, the business is classified according to its major output.
  • Second, employment figures represent an industry and not an occupation. Therefore industry data does not provide a clear picture of the types of work in which employees are engaged. For example many companies carry out some of their business services internally. Such services show up in the industry employment statistics for the whole business. For instance, an accountant at a steel mill would be counted in the employment statistics for the steel industry (NAICS 3311) rather than the business service industry (NAICS 5412). However, if the steel mill hired an accounting firm to do their books, this employee would show up in NAICS 5412.
  • Finally, for confidentiality reasons, data is often not made publicly available when it will identify individual businesses. While county data is usually available at very aggregated level, confidentiality concerns often arise at more detailed levels of analysis. This is especially true in smaller economic regions, such as rural counties.

For more information

More information on the NAICS and SIC codes is available on the Internet.

These materials are an update of those originally produced by Martin Shields, Professor of Economics at Colorado State University

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