Industry productivity trends under the North American Industry Classification system

Monthly Labor Review, Nov, 2004 by Matthew Russell, Paul Takac, Lisa Usher

The NAICS classification system presents a more consistent framework and a conceptual improvement for productivity measurement; while performance varied by industry, NAICS-based productivity measures show strong overall productivity growth during the 1990s and again after 2001--especially in manufacturing, trade, and in the newly defined information sector

The Bureau of Labor Statistics has recently completed converting its industry labor productivity measures to the North American Industry Classification System (NAICS). (1) The conversion mirrors efforts of the entire U.S. statistical system to more closely reflect the Nation's changing economy by better identifying service industries and new and emerging industries. This article describes the conversion effects on the industry productivity data, focusing on industry structure and data availability, and the resulting trends in industry labor productivity and related measures.

NAICS replaces the existing Standard Industrial Classification (sic) system that had been in use since the 1930s. (2) While the sic system was revised periodically over the years to reflect changes in the economy's industrial composition, its structure remained the same as first established in the 1930s. The focus remained on the goods-producing industries, particularly those in the manufacturing sector, which was prominent when the sic was first introduced. The most recent major revision to the sic occurred in 1987, and rapid changes since then in both the U.S. and world economies necessitated additional changes by the mid 1990s. The adoption of the North American Free Trade Agreement in 1994 highlighted the need for cooperation between the United States, Canada, and Mexico. The NAICS classification system was developed as a cooperative effort by the statistical agencies of these countries during the mid 1990s. The goal was to provide an improved industry classification system that would offer common industry definitions based on a unified economic concept for the three countries--and which would give special attention to service industries and to new, emerging, and advanced-technology industries.

Industry productivity measures

The Bureau of Labor Statistics has been measuring productivity for more than 100 years. A study of 60 manufacturing industries was published in 1898, and various other studies were conducted over the following years. Today's industry productivity program began in 1941, after Congress authorized the Bureau to undertake continuing studies of labor productivity. In 1959, BLS began producing labor productivity measures for the total private economy and major sectors on an annual basis; quarterly measures of these series were introduced in 1968. (3)

Labor productivity indexes measure the changes in the amount of goods or services produced relative to the labor hours used in producing that output. The indexes are calculated by dividing an index of output for an industry by an index of hours for that industry. Labor productivity measures reflect the joint effects of many influences--including changes in technology; capital investment; the use of purchased energy, materials, and services; the organization of production; capacity utilization; managerial skill; and the characteristics and effort of the workforce.

The conversion of the industry productivity measures to conform to the NAICS classification system is one in a series of recent improvements to the Bureau's industry productivity measurement efforts that began in the 1990s. In 1998, industry coverage was expanded to include labor productivity measures for all three- and four-digit sic manufacturing industries. Compensation and unit labor cost measures for three-digit sic industries were developed and published in 1999. In 2000, multifactor productivity measures were published for all three-digit sic manufacturing industries. Industry labor productivity and cost measures were extended to cover all three- and four-digit sic retail trade industries in 2001, and in 2002 for all three-digit sic wholesale trade industries. During this time, the adoption of superlative, chain-weighted indexes for calculating output was accompanied by other changes aimed at streamlining and standardizing the industry labor productivity series. (4)

The transition to NAICS caused a discontinuation of the historical SIC-based data used for measuring industry productivity. In order to maintain consistent, continuous series for measuring industry productivity trends, the historical sic-based industry measures were converted to a NAICS basis back to 1987. Converting industry productivity and cost measures to NAICS involved the separate conversion of output, employment, hours, and compensation for each industry. (5) Some NAICS industries are the same as their SIC counterparts, so that no special adjustments to data had to be made to convert the output measures. (6) For some other industries, the addition or removal of one or more products was all that was needed to convert the output measures to a NAICS basis. For other industries, however, constructing NAICS output series required greater data adjustments. In most cases where a NAICS industry was not a direct match to a corresponding sic industry, the NAICS output series were derived by applying a constant conversion or "bridge" ratio to the entire historical series (see Appendix for details). These historical NAICS estimates thus are based on the assumption of fixed historical relationships between the sic and NAICS series. Such an assumption may not be appropriate, particularly for new, emerging industries. (7) Revisions to current estimates based on ongoing research may be incorporated in future updates as more and better information becomes available.