North American Industry Classification System (NAICS): Business Activity Classification System

August 25, 2024 3 min read Economics Government Regulations NAICS Industry Classification Economic Data SIC Replacement Business Activity

The North American Industry Classification System (NAICS) is a system for classifying business activities, developed jointly by the United States, Canada, and Mexico. It uses six-digit codes and replaces the U.S. Standard Industrial Classification (SIC) system. This framework is integral for measuring productivity, constructing input-output relationships, and estimating employment-output relationships and other statistical measures.

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The North American Industry Classification System (NAICS) is a standardized classification system used to categorize business activities across North America. Developed collaboratively by the statistical agencies of the United States, Canada, and Mexico, NAICS provides a consistent framework via six-digit codes to identify and classify industries comprehensively.

History and Background

The NAICS was introduced in 1997 to replace the Standard Industrial Classification (SIC) system used in the United States. The shift aimed to better reflect the modern economic landscape and the evolving nature of industries. NAICS provides:

A uniform standard of industry classification across North America.
Enhanced data accuracy and industry analysis.
The ability to measure economic activities across national borders.

Structure of NAICS Codes

NAICS codes are six digits long. Each digit in the code represents a specific hierarchical level of classification:

First Two Digits: These represent the NAICS economic sector. For instance, “11” indicates Agriculture, Forestry, Fishing, and Hunting.
Third Digit: This defines the subsector, such as “111” which represents Crop Production.
Fourth Digit: This denotes the industry group, like “1111” for Oilseed and Grain Farming.
Fifth Digit: Further specifies the NAICS industry, for instance, “11113” for Dry Pea and Bean Farming.
Sixth Digit: Offers more detailed industry specifics, unique to each country, e.g., “111130” for Canadian businesses engaged in Dry Pea and Bean Farming.

Usage and Applications

NAICS data are pivotal for several analytical and operational purposes:

Measuring Productivity

Economists and policy-makers use NAICS classification to analyze productivity trends across various sectors, helping to pinpoint areas of growth and decline.

Input-Output Relationships

NAICS facilitates the construction of input-output models, which describe the flow of goods and services within the economy. This helps in understanding the interdependencies between different industries.

Employment and Output Relationships

By employing NAICS codes, statisticians can estimate employment levels and output for specific industry sectors, aiding in labor market analysis and economic forecasting.

Comparison with SIC System

NAICS supersedes the SIC system with enhanced granularity and current relevance:

Granularity: NAICS offers a more detailed classification, with six digits compared to SIC’s four.
Modernized Categories: NAICS better reflects contemporary industries like Information Technology and Biotechnology, which were not well-represented under the SIC system.

FAQs

Why was the SIC system replaced by NAICS?

The SIC system was outdated and did not reflect newer industries. NAICS offers more detailed and current classifications, enhancing data accuracy.

How often is NAICS updated?

NAICS is revised every five years to ensure it remains relevant with changing economic activities.

Can NAICS codes be used for global businesses?

While NAICS is specific to North America, many other countries adopt similar structures, making it adaptable for global business classification albeit with local modifications.

Standard Industrial Classification (SIC): The predecessor to NAICS, used in the U.S. before 1997.
International Standard Industrial Classification (ISIC): A global classification system adopted by the United Nations, similar to NAICS but applicable worldwide.

References

North American Industry Classification System (NAICS) Manual, U.S. Census Bureau.
Statistics Canada, Publications on NAICS.
Instituto Nacional de Estadística y Geografía (INEGI), Mexico.

Summary

The North American Industry Classification System (NAICS) is crucial for categorizing business activities across the United States, Canada, and Mexico. It addresses the modern economic structure, provides detailed industry data, and supports numerous analytical and statistical initiatives. Whether measuring productivity or analyzing employment trends, NAICS is indispensable for economic clarity and policy-making.