Industry FAQ

What does an industry classification system DO, exactly?
Industry classification systems describe the structure and activity of a country's or region's economy in numeric codes. These numeric codes provide a quick, shorthand way of referring to a previously defined industry. For example, in the American SIC system, there are the following codes for describing the aircraft engine industry, and showing how it fits into the broader economic picture: BS00900A.gif (904 bytes)

37: Transportation Equipment

372: Aircraft and Parts

3724: Aircraft Engines and Engine Parts

The shorter codes, the two-digit code 37 in this example, are used to describe broad sectors of the economy. The longer codes are used to describe the more specific, narrow industries.

It is probably more useful to ask the following question:

What are industry classification systems used for?
Industry classification systems are used to organize data collected by government agencies about economic or business activity, and then to present that data, or in other words, to publish the data. The data are collected at the level of the establishment, not at the level of legal entities (a.k.a. companies or enterprises).

Of course, the next question is:

What is an establishment?¹
An establishment is "the smallest operating entity for which records provide information on the cost of resources--materials, labor, and capital--employed to produce the units of output ... [The establishment] is generally a single physical location, where business is conducted or where services or industrial operations are performed (for example, a factory, mill, store, hotel, movie theater, mine, farm, airline terminal, sales office, warehouse, or central administrative office)."

1. NAICS Desk Reference. Indianapolis, IN: JIST Works, Inc., 2000. p. xii.

A Brief History of Industry Classification in the US ² timeline.gif (1550 bytes)

The US government began collecting industry data with the 1810 Census of Manufactures. But throughout the 19th century, there were huge problems with how data were collected and what data were collected. Clear industry definitions were not universally applied: therefore, for example, we do not know if "printers" meant the same thing to people in New York City as to people in San Francisco. As a result, government economic information at that time was very rudimentary.

During the mobilization for World War I, government officials realized how poor their economic information really was. They began to coordinate the collection of economic data by many government agencies, and began to develop a universal classification system, in other words a system of definitions, to make reliable analysis of the data possible. The Great Depression gave this endeavour a decisive impetus, as the government sought more and better information about the economy in order to prevent another collapse. One result was the Standard Industrial Classification System (SIC), first published in 1939/40.

The SIC contributed enormously to the quality and usefulness of government economic information, and it is still the most commonly used classification system. Nonetheless, constant amendment has made it unwieldy; and economic change has undermined many of its categories. The creation of NAFTA generated the need for a new system capable of organizing data on the economies or the US, Canada and Mexico. The result is the North American Industry Classification System (NAICS), which will supplant the SIC in 2004, at least for data collected by the US government.

2. For far more detail on the history of industry classification, read chapter 3 in the 2001 Report on the American Workforce (Mem Ref HD 5724 .R47); these brief paragraphs are drawn from it. It is also available online.

Intro to classification | SIC & NAICS | Other codes
From Question to Resource