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Statistical Policy Working Paper 11 - A Review of Industry Coding Systems
Click HERE for graphic. MEMBERS OF THE FEDERAL COMMITTEE ON STATISTICAL METHODOLOGY (February 1984) Maria Elena Gonzalez (Chair) Charles D. Jones Office of information and Bureau of the Census Regulatory Affairs (OMB) (Commerce) Barbara A. Bailar Daniel Kasprzyk Bureau of the Census Bureau of the Census (Commerce) (Commerce) Norman D. Beller William E. Kibler National Center for Education Statistical Reporting Service Statistics (Education) (Agriculture) Yvonne M. Bishop David A. Pierce Energy Information Federal Reserve Board Administration (Energy) Edwin J. Coleman Thomas Plewes Bureau of Economic Analysis Bureau of Labor Statistics (Commerce) (Labor) John E. Cremeans Fritz Scheuren Bureau of industrial Economics Internal Revenue Service (Commerce) (Treasury) Zahava D. Doering Monroe G. Sirken Defense Manpower Data Center National Center for Health (Defense) Statistics (Health and Human Services) Maria D. Eldridge Thomas G. Staples National Center for Education Social Security Administration Statistics (Education) (Health and Human Services) Daniel E. Garnick Robert D. Tortora Bureau of Economic Analysis Statistical Reporting Service (Commerce) (Agriculture) OFFICE OF INFORMATION AND REGULATORY AFFAIRS Christopher DeMuth, Administrator Thomas D. Hopkins, Deputy Administrator for Regulatory and Statistical Analysis Dorothy M. Tella, Chief, Statistical Policy Office Maria E. Gonzalez, Chairperson Federal Committee on Statistical Methodology PREFACE The Working Group on Industry Coding was initiated by the Administrative Records Subcommittee of the Federal Committee on Statistical Methodology to review the various existing industry coding systems and study their relationships, comparability and accuracy. The report presents information on the principles and procedures used to classify and code business establishments by industry within the framework of the Standard Industrial Classification (SIC) system. This report is intended primarily for Federal agencies that are responsible for industry coding. However, users of data classified by industry should also find it valuable to know more about the coding procedures and practices that affect the quality of the data. The findings and recommendations of this, report emphasize the need for increased interagency cooperation to improve the quality and, comparability of industry codes and reduce the cost and respondent burden of multi-agency coding efforts. A permanent interagency committee is recommended as the mechanism for coordinating improvements in industry coding systems. Implementation of the recommendations in this report will be explored by the Statistical Policy Office. The report does not necessarily reflect the views of the Office of Management and Budget. The working Group was chaired by Carl A. Ronschnik, Bureau of the Census, Department of Commerce; the Administrative Records Subcommittee is chaired by Fritz Scheurent Internal Revenue Service. i MEMBERS OF THE ADMINISTRATIVE RECORDS SUBCOMMITTEE (December 1983) Fritz Scheuren (Chairman) Daniel Kasprzyk Internal Revenue Service Bureau of the Census (Treasury) (Commerce) Faye Aziz Beth Kilss Social Security Administration Internal Revenue Service (Health and Human Services) (Treasury) Warren Buckler Carl A. Ronschnik Social Security Administration Bureau of the Census (Health and Human Services) (Commerce) Paul Burke Bruce Levine Department of Housing and Bureau of Economic Analysis Urban Development (Commerce) David W. Cartwright Brian MacDonald Bureau of Economic Analysis Bureau of Labor Statistics (Commerce) (Labor) Charles Cowan James Millette Bureau of the Census Bureau of Labor Statistics (Commerce) (Labor) Maria E. Gonzalez Douglas Sater Office of Management and Bureau of the Census Budget (Commerce) David A. Hirschberg Michael Searson Small Business Administration Bureau of Labor Statistics (Labor) Susan Hostetter Linda Bouchard Taylor Bureau of Labor Statistics Internal Revenue Service (Labor) (Treasury) Thomas B. Jabine Alan Zempel Consultant to Committee on Internal Revenue Service National Statistics (Treasury) (National Academy of Sciences) ii MEMBERS OF THE INDUSTRY CODING WORKING GROUP Carl A. Konschnik, Chairperson Bureau of the Census (Commerce) Linda M. Dill Social Security Administration (Health and Human Services) Susan Hostetter Bureau of Labor Statistics (Labor) Thomas B. Jabine Consultant to Committee on National Statistics (National Academy of Sciences) Beth Kilss Internal Revenue Service (Treasury) Bruce Levine Bureau of Economic Analysis (Commerce) James Millette Bureau of Labor Statistics (Labor) Linda Bouchard Taylor Internal Revenue Service (Treasury) Alan Zempel Internal Revenue Service (Treasury) iii ACKNOWLEDGMENTS The idea for this study grew out of the collective interest of the members of the Administrative Records Subcommittee in looking at industry coding issues. Data for the 16 major industry coding systems reviewed were first collected from the agencies on a questionnaire prepared by the Working Group. The questionnaire responses and associated documentation were then used to prepare "system descriptions" following a standard format developed by Thomas B. Jabine.Copies of system descriptions, which are in A supplement to this report entitled Description of Selected Industry Coding Systems, may be obtained from the Statistics of Income Division, Internal Revenue Service, D:R:S, 1111 Constitution Avenue, N.W., Washington, D.C. 20224. In addition to the members of the Working Group, the following persons contributed to the completion of the questionnaires and system descriptions; Bureau of the Census: Alfred R. Brand, Patricia A. Clark, Stanley M. Hyman, C. Harvey Monk, Walter E. Neece, Frank M. Hartman Bureau of Economic Analysis: George R. Kruer Internal Revenue Service: Bertie Brame, John Maiden, Patrick Piet, Paul J. Rose, Nathan Shaifer, Raymond Wolfe Social Security Administration: Cheryl Williams The working paper was reviewed by all members of the Working Group. The chapters were initially drafted by:. I. Susan Hostettert James Millette II. Carl A. Konschnik, Bruce Levine III. Linda M. Dill, Carl A. Konschnik IV. Thomas B. Jabine The entire Working Group provided comments to the initial drafts. The final wording was reviewed by the Working Group. Maria E. Gonzalez met with the Working Group throughout its term. Fritz Scheuren and members of the Administrative Records Subcommittee provided additional assistance and encouragement, as did members of the Federal Committee on Statistical Methodology. iv In the preparation of this working paper, substantial use was made of the following sources: 1. Farrell, M.G., Jabine, T.B., and Konschnik, C.A. 1982 A review of industry coding systems. Proceedings of the Section on Survey Research Methods, American Statistical Association. 2. Jabine, T.B. 1984 The Comparability and Accuracy of Industry Codes in Different Data Systems (in draft). Committee on National Statistics. Commission on Behavioral and social sciences and Education. Washington, D.C.: National Academy of Sciences. The second item is scheduled for publication in 1984. Several excerpts from it were used directly or with minor changes in Chapters III, IV and VI of this working paper. v A REVIEW OF INDUSTRY CODING SYSTEMS Table of Contents Page Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . .iv 1. Findings and Recommendations. . . . . . . . . . . . . . . . . . 1 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . 1 B. Code Sharing . . . . . . . . . . . . . . . . . . . . . . . 1 C. Standardization of industry Coding Principles . . . . . . 2 D. Standardization of Coding Procedures . . . . . . . . . . . 5 E. Documentation. . . . . . . . . . . . . . . . . . . . . . . 7 F. Matching Studies and Other Research. . . . . . . . . . . . 8 G. Interagency Cooperation. . . . . . . . . . . . . . . . . .10 II. Description of the Industry Coding Working . Group Project. . . . . . . . . . . . . . . . . . . . . . . . . . . .11 A. Introduction. . . . . . . . . . . . . . . . . . . . . . . .11 B. Scope of the Review . . . . . . . . . . . . . . . . . . . .14 C. Major Uses of industry Coding Information . . . . . . . . .15 D. Composition and Objectives of the Industry Coding Working Group. . . . . . . . . . . . . . . . . . . . . . .17 E. Development of the Basic Documentation for the Federal Industry Coding Systems. . . . . . . . . . . . . .18 III. Industry Coding Systems and Their Relationships . . . . . . . .21 A. Introduction. . . . . . . . . . . . . . . . . . . . . . . .21 B. Coverage. . . . . . . . . . . . . . . . . . . . . . . . . .21 C. Frequency and Timing of initial Coding and Updating . . . .28 D. Classification System Used. . . . . . . . . . . . . . . . .28 E. Classification Principles . . . . . . . . . . . . . . . . .30 F. Information Used as input to Coding . . . . . . . . . . . .35 G. Coding Procedures. . . . . . . . . . . . . . . . . . . . .42 H. Description of Systems Relationships . . . . . . . . . . .48 IV. Quantitative Information on Comparability and Accuracy. . . . .53 A. Introduction . . . . . . . . . . . . . . . . . . . . . . .53 B. Inter-system Macro-comparisons . . . . . . . . . . . . . .53 C. Inter-system Micro-comparisons: General. . . . . . . . . .55 D. Interagency Comparisons Between Systems. . . . . . . . . .56 E. Intra-agency Comparisons Between Systems . . . . . . . . .63 F. Data on industry Coding Error in Individual Systems. . . .72 V. References . . . . . . . . . . . . . . . . . . . . . . . .89 VI. Selected Source Documents and Instructions . . . . . . . .95 vi List of Tables Table Page 1 Selected Characteristics of Industry Coding Systems Reviewed. . . . . . . . . . . . . . . . . . . . . . . .23 2 Coverage of Industry Coding Systems Reviewed by SIC Division . . . . . . . . . . . . . . . . . . . . . . . .27 3 Interagency Transfers of Industry Codes . . . . . . . . . . . .51 4 Results of independent Coding of Establishments by Census and SSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-7 5 Summary of Errors as a Result of Reconciling BES and Census Records on Delaware Retail Payroll in 1963. . . . . . . . . . .59 6 Results of Comparison between Final Industry Codes and SSA-based Mailing List Codes: 1963 Economic Censuses. . . . . . . . . . .62 7 An Analysis of 1947-1949 Code Changes for 500 Single-Unit Establishments in Manufacturing . . . . . . . . . . . . . . . .64 8 Indexes of Shift for In Scope and out of Scope of Retail Trade by Kind of Business. . . . . . . . . . . . . . . . . . . . . . . .66 7 Major Kind-of-Business Cross-Classification of Group 1 Retail Trade Establishment Sales in Census and in Current Survey: United States, 1958. . . . . . . . . . . . . . . . . . . . . . . . . .67 10 Differences between IRS Master File and Statistics of income (SOI) Industry Classification by SIC Division and Type of organization. . . . . . . . . . . . . . . . . . . . . . . . . .69 11 Percent of IRS Master File Codes Agreeing with SOI Codes, by Type of Organization and Level of Detail . . . . . . . . . . . . . .71 12 Agreement of IRS Master File Codes with SOI Codes at Major Industry Level for Corporations: Tax Years 1972 and 1973. . . .72 13 IRS Statistics of income Program. Number of Incompletely Classified Returns by Industry Division and Type of organization . . . . . . . . . . . . . . .75 14 Reasons for industry Code Differences between Initial and Recheck Surveys: Retail Trade Surveys, 1948 . . . . . . . . . . . . . .77 vii Page 15 Indexes of inconsistency for Selected Major industries: 1960 and 1970 . . . . . . . . . . . . . . . . . . .79 16 Comparison of SIC Codes Based on Census Questionnaires with those Based on Administrative Records: 1977 Economic Censuses. . . . . . . . . . . . . . . . . . . . .81 17 Evaluation of Published Statistics for Nonemployers in Contract Construction: 1977 Census . . . . . . . . . . . . .82 18 Single-Unit Establishments in the SSEL with Current Year Payroll by SIC Division and Source: 1981. . . . . . . . . . . . . . . . . . . . . . . . . .85 viii CHAPTER I FINDINGS AND RECOMMENDATIONS A. Introduction This section presents the findings and recommendations of the Industry Coding Working Group. The recommendations are based on two goals: 1. To improve the quality and comparability of industry codes for all of the data systems reviewed by the working Group; and 2. To reduce the overall cost and respondent burden associated with initial industry coding and updating of codes for these systems. Meeting these objectives requires increased interagency cooperation in the areas of standardization and code sharing (the transfer of industry codes,for individual establishments or other economic units from one data system to another). With respect to these two areas, the Working Group found that: Significant improvements in quality and comparability of industry coding can be achieved by increased standardization of coding principles and procedures; however, a substantial increase in code sharing between agencies is needed to achieve the best results. B. Code Sharing Chapter III of this report describes the differences found by the Industry Coding Working Group in coding procedures, source documents, procedures for updating codes, and other features of the systems reviewed. These differences, which result in part from cost and respondent burden limitations, cause differences in the industry codes assigned to individual units. This applies both to statistical data systems and to systems developed primarily for administrative purposes. Chapter IV presents quantitative evidence, from several studies, of differences resulting from system variations. At present there are few transfers of industry codes between agencies. The primary transfers are from the Social Security Administration (SSA) and the Internal Revenue service (IRS) to the Census Bureau for use in the latter's economic statistics programs. (See Table 3 on page 51 for details.) The Working Group recommends that: 2 Agencies whose systems have been reviewed should expand industry code sharing to improve the quality of codes and to reduce code differences between systems. Increased code sharing between agencies should lead to more comparable and accurate industry codes in major Federal and Federal/State cooperative data systems. Initially, there would be a significant cost to develop a system to match units in different agency files and to deal with those cases in which the industry codes or the units fail to match. However, once these processing systems were established, considerable savings could be realized by cutting back on independent data collection activities for assigning and updating industry codes. Currently various agencies collect similar information from the same respondents for use in determining industry codes. Thus the beneficial impact "of code sharing between agencies on both respondent burden and cost should be extensive. To implement the recommendation for code sharing fully will require changes in the confidentiality laws currently governing the Federal statistical community. Except for a few specific cases, agencies may not, under current law, disclose individually identifiable microdata outside their own agency. C. Standardization of industry Coding Principles The Working Group found that the agency coding systems reviewed all based their classification systems on the current version of the SIC Manual, but that each of the systems departs from it in some respects. The nature of these departures from the SIC Manual is described in Chapter III of this report. It is not clear that all systems would be in a position to follow the principles of the ST exactly in every respect. Administrative requirements and resource limitations may sometimes preclude this. Nevertheless, the Working Group believes that greater adherence to these principles is feasible in most cases, and recommends that: All Federal and State agencies cooperating in Federal statistical programs that classify economic units (establishments or reporting units) by industrial activity should, to the greatest extent possible, follow the classification principles contained in the 1972 Standard Industrial Classification (SIC) Manual as amended by the 1977 Supplement. Agencies using the SIC Manual as the basis for assigning industry codes to establishments or reporting units should adhere to the following recommendations on specific classification principles. The specific recommendations do not necessarily apply for classifying enterprises or similar units. 3 1. The basic business unit should be the establishment as defined in the SIC Manual. The establishment is normally an economic unit at a single physical location and engaged in one, or predominantly one, type of economic activity. Special rules apply where two or more distinct and separate activities are carried on at a common physical location. The SIC manual is intended for assigning codes to establishments. However, some agencies assign codes to similar but somewhat differently defined units-- reporting units. As along range goal, these agencies should attempt to redefine their reporting units so that they are consistent with the establishment definition. 2. To the extent possible, all units should be classified by 4- digit SIC industry, using all of the industries included in the current SIC Manual. Most of the systems reviewed come close to following the SIC structure in the Manual, but use groupings of SIC industries in a few instances. Some aggregation occurs to avoid disclosure of individual establishment data. Some occurs because experience in some agencies shows that for certain industries adequate reporting records are not available on an industry-wide basis. Since different agencies aggregate for different reasons, varying groupings of industries result. Comparability of data by industry would be improved if participating agencies used all of the 4-digit SIC codes or could agree on and use a standard set of codes for grouped industries. This recommendation is not intended to preclude the use of additional classifiers for the same units. However, classifiers such as those used for administrative or tax purposes should be clearly distinguished from codes based on the SIC. The assignment of SIC's should not be altered or controlled in any way by the assignment of such additional codes. Some agencies, primarily the Census Bureau, assign industry codes in greater detail than provided by 4-digit SIC codes. This practice is acceptable as long as the detailed classifications are defined within 4-digit industries. 3. When an establishment or reporting unit has multiple activities, the SIC code should be determined according to the principles outlined in the SIC Manual. This recommendation implies, among other things, that the treatment of multiple activities be based on the variables recommended in the SIC Manual to measure the relative importance of each activity and that 4-digit SIC codes be assigned to each 4 activity of the establishment. Also it is necessary to assign a percent of total value for each activity for which a 4-digit SIC was determined and then group activities with the same 4-digit SIC's and sum the percent values. The establishment's classification would then be the 4-digit SIC with the greatest percent of total activity. 4. Information that identifies Central Administrative offices (CAO's) and auxiliary units must be collected and reviewed to ensure accurate determination of 4-digit industry codes. All systems should incorporate this information. As stated in the SIC Manual, a CAO is an establishment primarily engaged in management and general administrative functions performed centrally for other establishments of the same company. An auxiliary unit is an establishment primarily engaged in performing supporting services for other establishments of the same company rather than for the general public or for other business firms. Both CAO's and auxiliary units should be classified according to the primary 4-digit industry activity of the operating establishments they serve. Additional classification codes describing the type of function performed also should be standardized. The Working Group recommends that agencies responsible for industry coding adopt a uniform set of auxiliary codes for the classification of CAO or auxiliary activities for use in their systems. The codes would delineate activities such as central administration; research and development; warehousing; data processing; and repair shops. 5. Agencies should work together to arrive at consistent solutions to two problems generally encountered in classifying government operations-- determining ownership and distinguishing between operating and administrative operations. Many activities are quasi-government and the distinctions between government and private industry are often unclear. Most agencies have guidelines for determining ownership that follow the SIC Manual concept of "owned and operated". However, very little coordination and sharing of the interpretation of the rules have occurred. Developing a system for sharing and comparing concepts would foster consistency among agencies. The Public Administration division of the SIC Manual includes "...the legislative, judicial, administrative and regulatory activities of Federal, State, local and international governments." However, the government owned and operated establishments outside of public administration properly should be classified according to the activities in which they are 5 engaged. Coordination and cooperation among agencies should enhance systematic identification and reporting according to these standards. D. Standardization of Coding Procedures This section presents recommendations to improve and standardize coding procedures used by the systems to implement industry coding principles. Coding procedures considered most important are those that relate to the use of source documents, quality assurance training for coders, and resistance principles. Chapter III of this report describes source documents used by each of the systems reviewed. These source documents vary both in the level of detail requested and the format and wording of the items included. This variability has clearly contributed to differences between the systems. Chapter VI contains examples of source documents. Although it was beyond the scope of this Working Group to develop specific questionnaires or standards for questionnaires, the Working Group recommends that: 1. Agencies that do industry coding should work together to increase the uniformity of product, activity and related questions used in their source documents The Working Group believes that accurate 4-digit industry coding requires questions specifically tailored to SIC division level and for some intermediate groupings of 4-digit industries. Since some agencies may not have the need or resources to use forms designed for specific industry groups, the Working Group suggests the development of two kinds of model source documents: a set for specific industry groups and an abridged general purpose version. Separate versions for initial coding and updating are also suggested. The development of standardized source documents should be based on thorough research. The Working Group's recommendations for research on source documents are given in section F of this chapter. This report provides some information on Quality Assurance in Chapter III. However, most of the agencies reviewed had limited information on specific quality assurance measures used for their systems. The systems reviewed show considerable variation in the scope and intensity of procedures for maintaining and improving the accuracy of industry codes. The Working Group recommends that: 2. Each agency should review the procedures it uses to assure the quality of industry coding and should try to upgrade them where needed. 6 Because technology (both in industries upon which codes are based and in the processing and procedures used by agencies when assigning codes) is changing rapidly, the Working Group suggests that one or more interagency workshops be organized to discuss new developments in industry coding and to promote the exchange of information on coding procedures. Workshops should cover computerized coding (coding based on verbal descriptions or on quantitative product and service data), computer-assisted coding from activity descriptions, and computer consistency checks. Methods of reducing agency cost and respondent burden also should be examined. The Working Group found that agencies doing industry coding did not have formal training programs for coders in some of their systems. SSA provides extensive formal training for new coders in their single- unit employer identification (EI) file system. This is followed up by on-the-job training and close quality review. The Census Bureau provides training for large groups of coding technicians during the economic censuses, and ,the Bureau of Labor Statistics (BLS) provides an ongoing training program for all State coding technicians. However, for some systems more on-the-job training and less of a formal program is used. The Working Group recommends that: 3. Agencies should provide periodic training based on recommended coding course principles and procedures for their SIC coders. Such courses should include solutions, preferably those agreed upon by an interagency group, to coding problems arising from the development of new industries and from changes in existing industries. Resistance principles generally take prior industry codes, and related data into account in determining a current code. The purpose of using them is to. avoid erratic shifts back and forth from one industry to another and, in sample-based systems, to help control sampling variability. Lack of uniformity in the use of resistance principles has been one of many causes of industry classification differences between systems. The Working Group found that resistance principles, while frequently employed in the systems reviewed, were poorly documented and inconsistent among agencies. Therefore, the Working Group recommends that: 4. Agencies that apply resistance principles in updating industry classifications should collaborate to develop uniform guidelines for application of these principles. The rules used for resistance coding should be documented and made readily available. 7 E. Documentation A major accomplishment of the Working Group has been the collection of detailed documentation on the characteristics of industry coding systems and source documents used for SIC coding. System descriptions developed by members of the Working Group with the help of Other agency personnel include information about: the basic coding unit, the industry classification principles followed, the source document used, the coding procedures, the volume and timing of coding, the quality measures associated with the coding, the general characteristics of the file in which the codes reside, the timing and methods for updating codes, planned changes to the coding system, and the uses and users of the industry codes. (A collection of these systems descriptions is available as a supplement to this report (Internal Revenue Service, 1984).) This information serves as an essential tool for understanding the content of each system and the data produced from it. Therefore, the Working Group recommends that: 1. Complete documentation for coding systems included in this study should be updated at least every five years. Additionally, major changes occurring in any agency system should be documented and the information updated promptly. 2. All coding principles used by an agency principle which is either in addition to or contrary to those currently in the SIC Manual should be clearly described in agency publications that provide data by industry. 3. Coding rules embedded in programs for computerized coding systems should be fully documented in a form that makes them accessible to data users. 4. Results of quality control checks and evaluation studies of manual and computerized coding operations should be systematically documented and made available to users. The Working Group believes that agencies should adhere to certain standards for internal documentation. For example, cumulative files that contain industry codes should show the date of the most recent review and update for each unit and, where relevant, the source. in some cases it may be desirable to show more than one source code to avoid unnecessary restrictions on access. An agency may have data of its own and from other agencies, with differing restrictions on access. All data 8 sources should be identified to avoid unnecessary restrictions on release of codes to other agencies for statistical purposes. P. Hatching Studies and Other Research Chapter IV documents several matching studies. Generally.y, the findings of such studies have led to improved methodology within the matched systems, greater awareness of the need for interagency cooperation, and a better understanding of the impact of differences in economic data used for policy determinations. in addition, matching studies provide information on the feasibility of code sharing and supporting evidence for the importance of code sharing. Most major matching studies were conducted more than 10 years ago. The Working Group recommends that: 1. interagency microdata matching studies be conducted as a way of investigating the feasibility of code sharing and of quantifying differences between the systems. Matching studies should compare industry codes, along with selected data items such as employment, geographic location, and payroll, for units which match between agency files. The Working Group suggests that the studies first establish a sound matching process in areas with a high degree of agreement and comparability. Using matching processes identified as successful, a study should then focus on areas where classification is known to be especially difficult, such as wholesale and retail trade. Once differences are quantified, the agency specific procedures that cause the differences should be identified and improved. A current interagency group, the Employer Reporting Unit Match Study (ERUMS) Working Group, has done initial planning for a micro- record matching study to compare the statistical characteristics of the Social Security, BLS, and IRS systems. The ERUMS Working Group will examine the effects of the variations between agencies in defining the reporting unit. Currently, expectations are that a sample covering 400 employer identification (EI) numbers from one state will be selected from Unemployment insurance (UI) records. ADP and manual matching techniques will be used to match these units with those in SSA and IRS for the same EI's. A natural by-product of the study will be a comparison of the industry codes for matched units. The ERUMS Working Group expects to gain useful information about the kinds of problems that must be solved to match records from different economic data systems. While documenting facets of the various industry coding systems, the Working Group made no attempt to judge the relative merits of any specific form, procedure, unit identification or updating method. All of the source documents and procedures used 9 by these cooperating agencies lend themselves to research studies aimed at identifying benefits and limitations. Chapters III and IV of this paper discuss in some detail specific forms, procedures, levels of industry coding, frequency of updating information used to obtain codes, and other details of each system. Based upon the review of these source documents, the Working Group recommends that: 2. Research studies and tests be conducted with a view toward establishing the most effective source documents for SIC coding as standards. 3. Tests and research be conducted on current and new methods and procedures for industry coding. Tests and studies with varying sets of questions designed to elicit the nature of business activity should be cooperative ventures among agencies. Results of tests should be used to establish the most effective version as a standard. Since not all agencies can collect detailed information for use in industrial classification, the goal should be to develop standard questionnaires with at least two levels of detail. A research project testing the verification method of SIC updating has been initiated by BLS (Hostetter, 1983). This method utilizes a form containing a description of the four-digit SIC industry in which a particular employer was most recently classified. The form requests the employer to verify the industry description as an accurate indicator of his primary economic activity. If correct, the employer simply checks the appropriate box, answers some other questions on ownership, auxiliary status and multi-establishment status and returns the form. This reduces both respondent burden and staff time, since forms checked as correct need not be reviewed to assign an industry code. If the industry description does not correctly describe the economic activity, the employer then is asked to provide a detailed product and activity statement so that the correct classification can be determined. Currently, BLS has contracted with five State employment security agencies to conduct independent but identical quality measurement surveys testing the validity of the verification method of refiling. The Census Bureau has introduced computer-assisted coding and is currently researching and refining the process. Although computer- assisted coding and updating codes by verification both have potential for enhancing SIC coding, the Working Group does not endorse wide use of either method until testing and results substantiate their effectiveness. Additional cooperation among agencies on methodological research would allow progress toward standardization of all facets of industry coding. Even where standardization is not 10 possible, such research could produce detailed documentation of differences in data stemming from specific methods or procedures. This should prove useful to users who combine or compare data from different sources. G. Interagency Cooperation Increased interagency cooperation is essential for significant progress toward the goals stated at the beginning of this section: improvements in the quality, comparability and efficiency of industry coding systems. The OMB Statistical Policy Office's Technical Committee on Industrial Classification is devoting most of its attention to planning for the SIC revision scheduled for 1987, with somewhat less attention to the other important aspects of industry classification and coding. The Working Group recommends that: The activities relating to industrial classification and coding listed below should be undertaken either by the OMB Technical Committee on Industrial Classification or by another permanent interagency committee established for this purpose: 1. Regular meetings to discuss and resolve coding problems caused by the development of new industries and changes in the structure of existing industries. Interim solutions, pending revision of the SIC, should be agreed on and adopted by all of the participating agencies. 2. Promotion, support and coordination of other relevant activities along the lines recommended elsewhere in this chapter. Some examples of how this continuing committee might operate include: periodic updating of the industry coding system descriptions prepared by the Industry Coding Working Group; conducting interagency workshops for sharing information about new coding methods and procedures and about materials and methods used to train coders; promoting greater uniformity in source documents used for SIC coding; coordinating and facilitating interagency matching studies; developing standards for partial coding and for grouping 4-digit industries; and developing standards for resistance coding.. In addition to leadership from the Statistical Policy office of OMB and any interagency groups established for these purposes,, progress on these recommendations will require full cooperation from agencies that produce and use data classified by industry, as well as those that control administrative record sources. from which industry codes are developed. 11 CHAPTER II DESCRIPTION OF THE INDUSTRY CODING WORKING GROUP PROJECT A. Introduction Under the auspices of the Administrative Records Subcommittee of the Federal Committee on Statistical Methodology, the Industry Coding Working Group reviewed industry coding systems used by Federal agencies to classify establishments and other economic units for statistical purposes. The objective of this interagency working grout) was to review and document the existing industry coding systems with a view toward ultimately improving the comparability and quality of data classified by industry. This report describes the activity of the Working, Group and presents some findings and recommendations. By industry coding systems here we mean the methods and procedures for assigning industry codes, rather than the technical aspects of constructing a classification framework and numbering scheme within which economic units will be assigned industry codes. Moreover, the term "industry code" is used in a generic sense; it refers to the codes actually used in each system, which are not always equivalent to the four-digit industry codes in the Standard industrial Classification (Office of Management and Budget, 1972). The coding systems reviewed generally conform to the SIC, but all are at variance with it to some degree. The Working Group's effort was responsive to two recommendations made by a predecessor group, the Subcommittee on Statistical Uses of Administrative Records, which also worked under the auspices of the Federal Committee on Statistical Methodology. In its final report (office of Federal Statistical Policy and Standards, 1980), that Subcommittee recommended that: The quality of administrative records to be used for statistical purposes should be evaluated systematically to determine the appropriateness of the records for the proposed use. Consistent procedures should be used in administrative and statistical data collection efforts for defining reporting units, identifying and coding reporting unit characteristics, and developing standards for data tabulation. These recommendations apply with particular force to industry classification and coding, where the information sources are many and of varying quality. 12 In order to get some idea of the magnitude of the industry code assignment by the Federal government, consider the following. Annually, the Internal Revenue Service (IRS) assigns industry codes to nearly 16 million business units as part of its revenue processing of the tax returns. Additionally, more than 200,000 units are coded for the IRS Statistics of Income Program. Similarly, the Social Security Administration (SSA) assigns industry codes to over 900,000 new business units each year, with most of these (an estimated 875,000) coded in the Single-unit Employer Identification (EI) File coding operation. As part of the Employment Security Program, the Bureau of Labor Statistics (BLS) maintains an industry-coded file of about 4.8 million units. Each year about 500,000 new units are coded, and codes are reviewed annually and updated, where appropriate, for about one-third of the existing units. At the Census Bureau, as part of the annual Company organization Survey, over 900,000 establishments of multi-unit firms have their codes reviewed, and changed if appropriate, while about 75,000 new multi-unit establishments are industry coded. In addition to this, about 50,000 new business births are coded each year. For the quinquennial economic censuses, the Bureau mails census forms covering about half of the total universe of 6.7 million establishments in scope to the censuses. Responses to items included on the census forms are used to assign current industry codes to these establishments. Also, as part of the censuses, another 200,000 or so unclassified establishments are coded via a classification form mailing. The figures just cited account for a substantial percentage of the volume of industry coding done by, or under the auspices of, the Federal government. However, this is not the whole picture, as can be seen f rom Table 1 on page 23, where coding volume figures (from columns (9), (10), and (11)) are given along with other data. No attempt has been made in this work to quantify the substantial costs associated with industry code assignment. This would indeed be difficult, since the industry coding is a necessary (and in many instances a relatively small) component of the overall administrative or statistical work which is being done concurrently. Inconsistent industry classification of identical or overlapping populations of economic units by different agencies has led to problems of comparability for analysts and other users who try to compare and combine data from different agency sources. One example of this is in the area of productivity measurement. A recent report on this subject (National Research Council, 1979) said that "A major problem with the comparability of the basic data has been that different agencies assign the same establishments to different industry classifications, as a consequence,, aggregated data at the industry level are not in fact comparable 13 from agency to agency" (p. 178). Similar problems occur in connection with the preparation of the national income and product accounts, in manpower studies, in the development of a data base for small businesses, and in other uses of economic statistics. Several review groups have examined these problems (for example, the Central Statistical Board, 1939; the Hoover Commission, 1949; the President's Commission on Federal Statistics, 1971; the National Research Council, 1979; and the General Accounting office, 1979). Without exception, they have recommended creation of a central listing of establishments and other economic units, classified by industry, which would be available to Federal and possibly State agencies for statistical purposes. The Census Bureaus Standard Statistical Establishment List (SSEL) was in fact developed for this purpose, but existing statutory restriction--, on the release of Census Bureau information have so far made it impossible for other agencies to use the SSEL, except in a very limited sense. At the technical level, several studies of relationships between reporting unit definitions and industry coding practices in different agency systems were undertaken by interagency working groups, under the general direction of the Office of Statistical Standards of the Bureau of the Budget, in the early 1950's. Several of these studies which were begun in an attempt to account for observed discrepancies between manufacturing employment totals from the 1947 Census of manufactures and the BLS's Current Employment Statistics, involved matching individual reports for selected companies and establishments. These studies identified numerous problems that often impaired uniform reporting, many of which were solved by the working groups or referred to the Office of Statistical Standards SIC Technical Committee for action. The work during this period showed that significant progress toward comparability could result from carefully conducted studies of the coding principles and procedures used by different agencies and their application to particular units (Bureau of the Budget, 1961). Since that time, however, there does not seem to have been any comprehensive and detailed technical review of the existing industry coding systems: their coverage, the classification principles followed, the coding procedures, and the uses of the industry codes assigned and of aggregate data classified by these codes. The findings from the present review, the Working Group believes, will suggest changes in individual systems that can lead to significant improvements in quality and to greater comparability between systems. Also, these findings suggest advantages from new code sharing arrangements where these are permitted by law. Some gains can be realized even if there are no new exchanges of codes between agencies (for exchanges at present, see Table 3 on page 51). For example, the applicability 14 of shared software for computer assisted coding could be evaluated. Should future legislation permit the establishment and general use of a central list for statistical purposes, the Working Group's findings, suitably updated, should assist the implementation process. B. Scope of the Review The following 16 coding systems have been included in the Working Group's review: 1. Bureau of Economic Analysis (BEA) System -- Direct Investment Statistics 2. Bureau of Labor Statistics (BLS) System -- Employment and Wages Program (ES-202 Report) 3. Bureau of the Census Systems -- Agriculture Census -- Business Births -- Company Organization Survey -- County Business Patterns -- Economic Censuses 4. Federal Trade Commission (FTC) System -- Quarterly Financial Report 1/ 5. Internal Revenue Service (IRS) Statistics of Income (SOT) Systems -- Sole Proprietorships -- Partnerships -- Corporations 6. Internal Revenue Service (IRS) Administrative Systems (Revenue Processing) -- Sole Proprietorships -- Partnerships -- Corporations 1/ Responsibility for publishing the Quarterly Financial Report was transferred to the Census Bureau in late, 1982. However, throughout this paper all references to the FTC system or Quarterly Financial Report apply to the time period before the transfer. 15 7. Social Security Administration (SSA) System:; -- Single-unit Employer identification (EI) Pile -- Multi-unit EI File The systems selected for review include some used only for statistical purposes (e.g., all Census systems) and some that are used for both statistical and non-statistical purposes (e.g., the IRS revenue processing systems). All of the systems assign codes to establishments or other economic units; systems that assign industry codes directly to individual workers were not included. most of the systems reviewed have broad coverage in terms of Standard industrial Classification (SIC) divisions; however, there are some exceptions, such as the Agriculture Census system. All are of a more or less permanent character, i.e., the universe or a sample of it is coded periodically, or the coding is continuous in support of accretions or changes to a cumulative file. Most systems have a relatively large volume of coding, and together they are believed to account for a substantial proportion of the industry coding of establishments and other business units that is done by the Federal government and by State agencies under Federal-State cooperative programs. It was necessary to distinguish between an industry coding system and the principal file in which the codes reside. To illustrate this, generally, industry codes assigned to establishments by the Census Bureau are placed in the Standard Statistical Establishment List (SSEL). (Industry codes assigned to agriculture establishments during the agriculture census processing are not placed in the SSEL, while those assigned to agricultural services establishments are.) However, the separate industry coding activities done at various times and based upon different source documents are treated as separate industry coding systems. C. Major Uses of Industry Coding Information The statistical uses of administrative records are well Documented in Statistical Policy Working Paper 6 (Office of Federal Statistical Policy and Standards, 1980). These uses range widely from the basic publication of statistics describing economic or demographic phenomena to being used as components in the formulation of complex mathematical models. In general, industrial classification was developed for classifying an establishment by the activity in which it is primarily engaged. The presence of industry codes can facilitate the collection, tabulation, presentation and analysis of data as well as promote uniformity and comparability of data series. The Federal Government uses industry codes as a means of aggregating much of the administrative and statistical data it collects for publication. Some examples of the regular publication of descriptive statistics by industry from primary data sources include: 16 - Quarterly Financial Report _for Manufacturing,_Mining and Trade Corporations by the Federal Trade Commission (FTC). - Corporation Income Tax Returns, Sole Proprietorship) Returns, and Partnership Returns by the Internal Revenue Service (IRS). - Census Bureau publications such as County Business Patterns and the results of the economic censuses. - Employment and Earnings and Employment and Wages by the Bureau of Labor Statistics (BLS). There are other data series published that have been synthesized from several primary data sources. The Bureau of Economic Analysis (BEA) , for the most part, does not collect information directly from firms or individuals. BEA's estimates of current economic activity are based on data obtained from other agencies. The Gross national Product, which is presented with industry detail, combines data from many sources including the Census Bureau, IRS, BLS, and FTC. The Input-Output Accounts of the U.S. are composed entirely of industry information collected by others. BEA's estimates of State and local area personal income involve the use of several sets of data aggregated by industry. BEA is thus heavily dependent on the comparability of data from its various sources. In addition, both published and unpublished sets of industry - based data are useful for the collecting agency's internal programs. For example, various units of the Department of Labor use BLS data for purposes such as: - studies of financial aspects of the Unemployment Insurance program are conducted to set maximum weekly benefit levels. - States use industry wage and employment data in preparing forecasts of program workloads that are used in developing annual budgets. - Local area workforce and unemployment statistics are produced by industry which enables classification of areas eligible for benefits under a number of Federal area assistance programs. - Employment figures are useful in time-series analysis and in the study of seasonal employment, and are used extensively in industry/area comparisons. 1/ Responsibility for publishing the Quarterly Financial Report was transferred to the Census Bureau in late 1982. 17 - The data serve as a base for labor market information programs at the county, labor market area, State and national levels. Industry codes from some administrative or statistical record systems are helpful in the processing and tabulation of raw data in other record systems. The Social Security Administration (SSA) assigns industry codes to new firms applying for an employer identification number. A major use of these codes is for identifying industrial activity for workers included in the Continuous Work History Sample (CWHS). These codes are also released to the Census Bureau for incorporation into their standard Statistical establishment List. Reciprocally, on some past occasions, the Census Bureau has provided SSA with updates of industry codes for employers based on the results of the economic censuses. Some data producers can use the industry codes from other systems as a tool to edit aggregated tabulations. BEA, for example, receives industry codes from FTC and IRS for individual corporations which help to explain changes in their estimates of components in the National income and Product Accounts. There are other uses that governmental units make of the industry information that they can obtain from data producing agencies. The IRS, for instance, releases its industry coded Statistics of Income (SOI) files to the office of Tax Analysis and to the Joint Committee on Taxation for use in "tax models" to evaluate the effects of existing or proposed tax policies. Nongovernment groups such as businesses and nonprofit organizations use industry information from administrative and statistical sources as well. While confidentiality restrictions prohibit the transfer of individual industry codes outside the government (except to contractors of government agencies), aggregated statistics based on industry can be quite useful. Business firms can conduct research to classify and study the industrial profiles of their customers and suppliers. Sales patterns can be analyzed, market potentials can be estimated and commercial strategies can be evaluated. The industry dimension of administrative and statistical data is one of their most interesting and useful characteristics. It enables the government to improve and evaluate many of its programs. It enhances the research efforts of both public and private groups and it is very helpful to individuals in gaining understanding of the economic and demographic characteristics of the nation. D. Composition and objectives of the Industry Coding Working Group The Working Group members (see list in preface) were in some cases members of the parent subcommittee or were designated by 18 the subcommittee representative or their agency. Working Group members met for the first time in May of 1981 and have conducted meetings, generally monthly, throughout 1982 and 1983. From the outset the Working Group felt that a fundamental task was to review and document the major industry coding systems. Once this was accomplished, analysis and comparison followed, leading to the proposals for improvements in the comparability and quality of the industry codes which appear in Chapter I . As a further application of this work, a user or potential user of data classified by industry can be provided with essential information concerning the usability and relative quality of the data. E. Development of the Basic Documentation for the Federal Industry Coding Systems The Working Group constructed a questionnaire on industry coding which requested basic information needed to compare and assess the systems. This questionnaire covered the following main areas: - The basic coding unit (the unit to which an industry code is assigned), the source or source document from which tile coding is done, and the industry classification system use]; - The volume, timing, coding procedures, resource material used, and quality measures associated with the coding; - General characteristics of the principal file(s) in which the codes reside; - Updating of the codes and recent or planned changes to the coding system; - The uses and users of the industry codes. Within each of these areas specific questions were asked. Also, related documentation was requested, principally the forms or source documents from which the coding is done, code lists and instructions concerning classification system variations, and any available data bearing on the quality of the coding. Members of the Working Group identified industry coding systems within their own agencies which fit into the scope of the review. At the same time, they identified key persons who were most knowledgeable about each coding system. The survey questionnaires were then delivered to these respondents by the Working Group members. Each completed questionnaire was reviewed by one or more members of the Working Group and a meeting was arranged with the respondent for clarification or further information. As a result 19 of the meeting, the questionnaire was revised, and frequently additional documentation of the system was obtained. A summary system description was prepared from each questionnaire and the associated materials. These descriptions Are designed to put the collected in formation in a standardized, concise format for easy reference, comparison, and analysis. These summary descriptions form the basis of this report. Copies of system descriptions may be obtained by contacting the Statistics of income Division, Internal Revenue Service. 21 CHAPTER III INDUSTRY CODING SYSTEMS AND THEIR RELATIONSHIPS A. Introduction This chapter provides an analysis of the coding systems reviewed. This analysis should provide a stimulus to the agencies maintaining the systems to make changes aimed at increasing comparability with other systems and at improving the accuracy of codes and reducing the cost of coding in their own systems. in addition, the information developed can make possible a technical evaluation of possible new arrangements for interagency code sharing, subject to legal restrictions on such exchanges. Finally, the results should help users of data from these systems to understand their structure and limitations and the extent to which lata from different systems are comparable. An initial step is to identify the system characteristics or dimensions to be compared. The primary dimensions that have been identified are coverage, frequency and timing of initial coding and updating, classification system used, classification principles, information used as input to coding, coding procedures, and description of systems relationships. Each of these dimensions is discussed in the following sections. B. Coverage Systems coverage has 3 sub-dimensions which can be described by the answers to 3 questions: What kinds of units are coded? Which of these units are included in the target population? And, finally, is coding for all units or for a sample? 1. Kinds of Units Coded The kinds of units that are classified by industry vary widely. The Standard Industrial Classification (SIC) was developed for classification of establishments by industry. Its offshoot, the EnterPrise Standard Industrial Classification (ESIC), was developed for classification by industry of enterprises or companies, many of which consist of two or more establishments (Office of Management and Budget, 1972, 1974, and Office of Federal Statistical Policy and Standards, 1977b.) Concerning this first aspect of coverage, basic coding units or simply units, i.e., the units of observation to which industry codes are applied, are often determined by intended uses of the data files. For example, the Census Bureaus systems, which are established and maintained solely for statistical purposes, use establishments as the basic unit. However, the Standard Statistical Establishment List (SSEL) which is the 22 basic file in which industry codes produced by the various Census Bureau systems reside, is organized to permit the aggregation of groups of establishments to form other units, such as Employer Identification (EI) number units (all establishments operating under a single EI number) and enterprises, and the assignment of industry codes to these units. By contrast, the units used in the systems of other agencies (e.g., employers, tax entities, consolidated corporations) are determined largely by administrative requirements. Table I on page 23 provides a comparison of the basic coding units used for each system studied, as well as comparisons of SIC level of, detail used, sample or population coverage, an assessment of the level of input data available for assignment of codes, updating cycles, and the average annual volume of coding. In practice, business enterprises consisting of a single establishment, as defined for purposes of the SIC, are classified in essentially the same way in all of the systems reviewed by the Working Group. There are, to be sure, some elements of judgment in the SIC definition, especially in those instances where "...distinct and separate economic activities are performed at a single physical location..." (Office of Management and Budget, 1972, p.10). The SIC Manual states that these activities shall be treated as separate establishments if the employment in each is "significant" and reports can be prepared separately for each activity on employment, payrolls, sales or receipts and other establishment type data. These criteria clearly allow some latitude for judgment by the agency collecting the data, and one could expect to find some cases where establishments were defined differently by different agencies. Nevertheless, the major conceptual differences among systems with regard to definitions of basic coding units are those affecting only multi-establishment enterprises. Here the systems reviewed use a variety of units, including those with a legal, administrative, or statistical basis, such as employers, taxpayers, corporations, consolidate, corporations, or "reporting units". The "reporting units" used by BLS and SSA deserve special attention. Although they have the same name and have been established for similar purposes, their operational definitions are not identical for .multi-establishment employers. Basically, the reporting unit in each case is a group of two or more establishments under the same employer (El number) in the same county and four-digit industry. It has been so established for the convenience of employers who would find it difficult or burdensome to file separate administrative returns to SSA and to State Employment Security Agencies for each establishment. The BLS system is primarily an establishment based system. However, under certain circumstances a "reporting unit" concept is substituted. The "reporting unit" used by BLS 25 includes two or more establishments under the same employer identification (EI) or Unemployment Insurance (UI) account number in the same county and industry. These exceptions to establishment based reporting are allowed in order to reduce employer quarterly unemployment insurance tax reporting burden. Exceptions to county/industry level reporting are discouraged. SSA also uses a "reporting unit" concept under their establishment Reporting Plan (ERP) to facilitate the processing of large multi-unit employer wage reports. When an employer firm agrees to participate in the plan, it is asked to identify each of the firm's retorting units (which may be establishments or payroll groupings) by geographic location (county) and industrial activity and assign a four-digit reporting unit number to each on a Form SSA-5019. on subsequent annual wage reports the firm groups its employees by reporting unit, identifying each with the preassigned unit number. This arrangement provides a basis for SSA to isolate earning discrepancies and to assign geographic and industrial classification to each unit so that wage reports can be used as a source of statistical data. However, it should be noted that due to the voluntary nature of ERP, every effort is made to set up and maintain a breakdown of,reporting units that most closely conforms to the firm's internal business structure in order to minimize the reporting burden on the employer. This may or may not result in the use of establishments as the reporting unit. In summary, operational, procedural, and definitional differences make it difficult to compare the net effect of the use of the "reporting unit" concepts in the BLS and SSA systems. Finally, it is worthwhile to point out that for all systems the nature of the units which are classified by industry in each system is affected not only by the formal definitions but also by the specific procedures used to implement these definitions. 2. Units Included in the Target Population The second aspect of coverage is to identify which of the specified units are included in the target population for the system. The 5 principal criteria are: a. Geographic location. All systems cover units located in the United States and owned by United States citizens or legal entities. Treatment varies for units located in United States territories and possessions, for units with non-United States ownership physically located in the United States, and United States- owned units located outside of the United States. b. Legal form of organization. Each of the IRS systems covers only one form of organization: sole proprietorship, partnership or corporation. The FTC Quarterly Financial Report system covers only corporations. Most systems cover all forms of organization. However, coverage of government-operated units differs greatly, as described in d. below. 26 C. Presence of employees. Sole proprietorships or partnerships with no employees are included in the IRS systems if they are required to file tax returns. These nonemployer establishments are incorporated into the economic censuses from IRS records; they are not independently contacted by the Census Bureau. Also, establishments without payroll are included in the Census of Agriculture. All other coding systems code only units with employees. d. SIC divisions. Some systems are restricted to specified SIC divisions or parts of divisions. For example, the Census of Agriculture covers only part of Division A (Agriculture, Forestry, and Fishing). The FTC Quarterly Financial Report system covers only corporations whose primary activity is in mining, manufacturing, wholesale trade and retail trade. The inclusion of government units varies. They are not covered at all by IRS systems, but are covered in part by several other systems. The BLS Employment and Wages system covers government employees at all levels, except for members of the armed forces. e. Size. Industry coding in the economic censuses is limited to employer establishments which exceed payroll cutoffs that vary by industry. These cutoffs are set to exclude the smallest establishments within an industry from getting a census form. The census data, including industry codes for these small Establishments, are taken from administrative records. In the Census of Construction, however, census forms are mailed to a probability sample of establishments below the established cutoffs, and sample estimates for this group are included in the census totals. Table 2 on page 27 shows the coverage of the systems reviewed with respect to criteria b., c., and d. For this purpose, the six IRS systems were grouped to form two "mega-systems": the Revenue Processing and the Statistics of Income systems. 3. Coding for a Sample or a Population The third aspect of coverage is whether or not sampling is used. If it is, the particular sample design will affect the frequency with which coding is required and the potential for sharing industry codes with other systems. Examples of sample based systems are the IRS Statistics of Income systems, the FTC Quarterly Financial Report system, and the Census Bureaus Business Births coding system. Of all systems reviewed, the IRS systems (condensed in Table 2 from six to two systems) are the most complete, covering all SIC divisions except J, Public Administration, and all forms of organization except "government establishments" in the other SIC divisions. 28 The most complete coverage of Division J, Public Administration, is by the BLS Employment and Wages System, since most public as well as private employers are covered by the Unemployment Insurance system. It should be-noted that the 1972 revision of the SIC changed the principles for classification of "government establishments." Previously, most of them had been classified under Division J, Government; since 1972, each one is to be classified by its primary economic activity, with only those not classified in other divisions to be assigned to Division J, Public Administration. One result of this change is that the TRS systems, which do not include any "government establishments" (since they are not taxed) , can no longer be expected to have full coverage in all of the other SIC divisions. For employers, i.e,, businesses with one or more paid employees, the BLS Employment and Wages and the SSA single-unit EI systems between them should have virtually complete coverage of all SIC divisions. The BLS system excludes railroads and some "small" agricultural employers (the cutoff varies by State); the SSA single- unit system has only partial coverage of Federal, State and local government employers and tax-exempt nonprofit organizations. C. Frequency and Timing of Initial Coding and Updating The extremes of this dimension can be represented by the IRS revenue processing coding systems and the SSA single-unit EI System. In the IRS revenue processing systems, industry codes are assigned annually to businesses reported on tax returns, without reference to prior year codes. In the SSA system, each covered employer is assigned an industry code at the time of entry into the system, which occurs when the employer applies for an EI number. This code is generally retained in the system unless and until updated, primarily by matching against economic censuses codes for the employers in the file. These two approaches can be distinguished by the labels "periodic, independent" for the approach represented by the IRS systems and cumulative" for the approach represented by the SSA single-unit system. As another example, BLS has a tight schedule for new code assignments, along with a three year cycle for updating. Many systems lie somewhere in between the extremes. Where industry coding is done for a sample of units in the target population, the approach used will depend on whether and how much the samples for successive time periods overlap. D. Classification System Used All of the systems studied use a classification scheme based on the SIC. Some systems which classify groups of establishments, e.g., the IRS systems for corporations, use systems based on the ESIC, which in turn ties into the SIC. For the systems reviewed by the Industry Coding Working Group, the following assertion can be made: While each 29 classification system is based on the 1972 SIC 1/ or the 1974 ESIC (which in turn is derived from the 1972 SIC), each system departs from it in one or more respects. These departures fall into three categories: -- grouping of SIC categories -- subdivision of four-digit SIC categories -- addition of categories not covered by the SIC For the systems reviewed, grouping of SIC categories is more common than subdivision. The SIC contains 1,005 four-digit and 421 three-digit codes. The systems of IRS use a much smaller number of categories than the others, currently in the neighborhood of 200 for each of its 6 systems. The groupings vary by type of organization; there are different groupings for sole proprietors, partnerships and corporations. For each organization type, the groups for the Revenue Processing and Statistics of Income (SOI) systems are essentially the same. There are a few instances where IRS has subdivided SIC industries. For example, in the partnership systems, SIC Industry 7011, Hotels, Motels, and Tourist Courts has been divided into (1) hotels, and (2) motels, motor hotels, and tourist courts. The BLS system uses most (971 of the 1,005) four-digit industry codes. In the 34 remaining industries, BLS experience is that four- digit sic level coding is often unreliable because of conditions that prevail in these industries, such as frequent fluctuations in employer products or services or generally inadequate employer records. The SSA system also uses most of the four-digit industry codes. in the SSA systems, the full four-digit SIC Code is the preferred code, except for major groups 01 (agricultural production -- crops) and 02 (agricultural production -- livestock) , and division i (public administration) , where only the two-digit detail is provided. The codes used for these groups are called "foldback" codes. Thus, there are 63 of the 1,005 SIC industry codes which are not used at all. For 115 industries, "foldback codes" are used only if the employer does not furnish enough information to code to the four-digit level; followups for additional information are not attempted by SSA. The use of these foldback codes was especially heavy during a period in the early 1970's when SSA was doing "dual coding" (assigning two codes to each employer, one based on the 1967 SI. and one based on the 1972 SIC) in preparation for conversion of their systems to the 1972 SIC. In summary, it seems fair to say that full SIC detail is lacking in SSA's systems for 178 of the 1005 industries in the 1972 SIC. 1/ AS revised by the 1977 Supplement (Office of Federal Statistical Policy and Standards, 1977b). 30 The Census Bureaus industry classification system for the 1977 Economic Censuses is described in its 1977 Industry and Product Classification Manual (Bureau of the Census, 1977b). The latest version of this IPC manual for the 1982 Economic Censuses has recently been released. Census establishment codes carry full SIC four-digit industry detail except when information available for classification is incomplete, or when publication of establishment data for a particular industry would disclose individual company operations. Industries affected by the latter restriction for 1977 are: (1) Mercury, 1092, grouped with 1099 (2) Typewriters, 3572, grouped with 3579 (3) Electronic tubes, 3671 to 3673, carried as 3671. In addition, for economic censuses purposes, the IPC Manual provides for subdivision of selected industries in SIC major groups 41, 42, 47, 50-59 and 70-89, i.e., in the areas of transportation, wholesale and retail trade, and services. The "sub-industries" are identified by adding two digits to the four digit SIC code. For the 1977 Economic Censuses, 83 four-digit industries in these major groups were subdivided to form 256 six-digit sub-industries. Two different patterns have been followed in subdividing four-digit industries. In most cases, there is only one level of disaggregation for an industry, i.e., the six-digit codes differ only in the 5th digit, and the 6th digit is 0. In a few cases, however, there are two levels of disaggregation, i.e., one or more of the five-digit codes will be subdivided by using different digits in the 6th position. All of the systems have conformed to SIC revisions; in addition, many of them have introduced other changes from time to time, usually in the direction of showing more detail. E. Classification Principles Given the general principle of adherence to the SIC, there remain several conceptual issues to be dealt with in order to develop the procedures to classify establishments or other units by industry (Simmons, 1953). These include: 1. Classification of units with multiple activities. Under some conditions, such units may be split and classified separately. This option is more likely to be used when reports are filed solely for statistical purposes. When it is not used the first decision needed is what measure of activity to use. Options include gross receipts, value of sales, value of production, value of shipments, and employment or payroll associated with each activity covered by a separate SIC code. A second decision is how to use these measures to determine the principal activity. one option is to simply choose the 4-digit (or 6-digit if using IPC) category with the highest value of the measure chosen. An alternative sometimes used is a hierarchical 31 procedure: choose first the SIC division which has the highest value, next the major (2-digit) industry within that division with the highest value, and so on until the 4-digit or 6-digit level is reached. For establishments the main question is what measure of the relative importance of different activities should be user? The 1972 SIC Manual (Office of Management and Budget, 1972) is F clear on this. It states that "Ideally, the principal product or service should be determined by its relative share of "value added" at the establishment" (p. 12). Recognizing, however, that data for value added for each product or service are difficult to obtain, it recommends that the following data measures be used (SIC Manual. p. 12): Division Data Measure Agriculture, forestry, and fishing, Value of Production hunting, and trapping (except agricultural services) Mining Value of Production Construction Value of Production Manufacturing Value of Production Transportation, communications, Value of receipts or electric, gas, and sanitary services revenues Wholesale trade Value of sales Retail trade Value of sales Finance, insurance, and real estate Value of receipts Services (including agricultural Value of receipts services) or revenues Public administration Employment or-payroll The recommendation is qualified in two ways. First, it is stated that these measures should be used "when available." Second, it is stated that in some instances, an industry classification based upon the recommended output measure will not represent adequately the relative economic importance of each of the varied activities carried on at such establishments. In such cases, employment or payroll information should be used to determine the primary activity of the establishments." Once relative (or absolute) values of the measures have been obtained for each product or service by four-digit industry, the establishment is coded to the industry with the largest share 32 of the total, without regard to the shares of higher-level SIC categories (industry groups, major industries, or divisions). To what extent are these recommendations followed in the systems reviewed by the Industry Coding Working Group? Following is a summary of the practices of the four major agencies. It will be seen that none of the agencies follows the SIC Manual in every respect. BLS -- For all SIC divisions except Division J, public administration, the source documents for industry coding ask for sales or receipts. The source document for government reporting units asks for employment or payroll. Census -- According to the official description of industry coding procedures for the SSEL (Bureau of the Census, 1979), the recommended measures are used except in Division C, construction, where value of receipts is used in place of value of production and Division D, manufacturing, where value of shipments is used in place of value of production. It should be recognized, however, that the specified measures are not available on a current basis for some units in the SSEL, in particular, those that are out of scope of the economic censuses or are not included in the mail portion of the censuses. IRS -- Taxpayers are asked to provide codes and/or short descriptions of their "principal activity,, which is generally defined in the instructions as the one accounting for the greatest proportion of sales or receipts. There are two exceptions to this general rule. First, the tax schedule (Schedule r) for farm sole proprietors contains entries for income (receipts) for each of several distinct crop and livestock items, so that a more objective basis is available for coding to industries within this division. Second, starting in tax year 1977, the instructions for the partnership tax return (Form 1065) have stated that the principal activity should be the one accounting for the largest proportion of assets. Before then, the standard instruction to base principal activity on sales or receipts was used. SSA -- Currently employers applying for an EI number are asked to describe their "nature of principal business activity" without any specific reference to the treatment of multiple activities. Multi- unit employers who provide data for their separate establishments or reporting units are asked to provide percentages corresponding to the principal activities of each one, listed in order of importance, but the instructions do not say on what measures these percentages should be based. The report form also asks for number of employees engaged in each activity. In the coding process based on these reports, a manufacturing industry code is preferred over all others if the associated percentage is 20 percent or more. 33 Except for the SSA special treatment of manufacturing just noted, all agencies assign the industry code for the category with the greatest share of activity, using data by four-digit SIC industry or the most detailed level contained in the system. One solution that has been proposed for the multiple activity problem is to assign more than one industry code to establishments with more than one activity. The Census Bureau has developed but not yet implemented a proposal that the SSEL include secondary activity codes for each four- digit SIC activity with sales/receipts of $100,000 or more (Bureau of the Census, 1979). The record for the establishment would carry a sales/receipts size class code corresponding to each activity code. 2. Time interval and reference period One year is the standard time interval for most systems. The SSA systems are an exception; the input document asks for a description of the principal activity carried on, without any reference to a specific time period. Most systems use a calendar year, but in some systems the reports are for tax years or fiscal years, which are not equivalent to calendar years for all units coded. Another important consideration is the relationship between the reference period for code determination and the period for which data are collected and the code assigned. This leads to the question of updating, i.e., how often should industry codes be revised? There is considerable variation both between and within systems as to the frequency of updating industry codes, or refiling, as it is sometimes called. When a system is used to produce aggregate data such as employment, payroll, receipts, etc., classified by industry, the reference period on which the industry code is based may not be the same as the period covered by the data. The.major industry coding systems reviewed do, in fact, differ considerably in this respect. Following is a broad outline of the differing practices followed by each of the four major industry coding agencies. IRS -- Returns are industry coded annually, based either on self- coding by taxpayers, or coding from an activity description on the tax return. Thus, for data by industry from the IRS systems, the reference periods for the data and the industry classification always coincide. BLS -- Each resorting unit is classified initially when the employer enters the unemployment insurance system. It is BLS policy that codes should be reviewed and updated on a fixed time schedule, as follows: 34 Type of Unit Frequency Units with 500 or more employees, Annually except government All other units, except government Every 3 years Government units Every 5 years The timing of the 3-year cycles varies by SIC division, so that review and updating is done for units in certain divisions each year. information leading to code changes may come from other sources between regular updates; the extent of such changes and how well they track actual changes is not known. The source documents used for initial coding and updates request relevant information on activities for the most recent calendar year. SSA -- Each employer is classified initially at the time an application for an EI number is filed. The application form asks for information about the nature of the business at the time ,of the filing; there is no defined reference period. Shortly thereafter, eligible multi-unit employers are asked to submit activity information for each of their reporting units, the situation with respect to reference period being the same as for the original application form. For single-unit employers, the last general update was based on a comparison with codes assigned in the 1972 Economic Censuses. For multi-unit employers, changes are based either on reports filed voluntarily by employers or on correspondence initiated by SSA when the units for which current wage reports are submitted do not match those in the file. Resources for such correspondence are limited. Since both the single and multi-unit employer files carry date codes indicating the most recent update of the employer's industry classification, it would be possible to tabulate each file to obtain a distribution of employers by years elapsed since last update. Census -- Reference periods vary by coding systems. For units covered by mail (or interview) in economic censuses, the industry classification has the same reference period as the data. This is also true in some but not all current surveys. Perhaps the best approach is to consider the SSEL, which provides the frame for all censuses and surveys and for the annual County Business Patterns program.l/ For the larger multi-unit companies, industry codes for their establishments are updated annually in the Company Organization Survey. Smaller multi-unit companies are updated once between five-year economic censuses. A.t the other end of the spectrum, industry codes for single.-unit 1### - true for all units with employees. IRS is the main source of information for zero-employee units. 35 employers outside the industry scope of the economic censuses (such as those included in Division H, finance, insurance, and real estate, and some industries in other divisions) and for those small employers who are in scope but not included in the mail portion of the census will in most cases be the original codes assigned to them by SSA when they applied for EI numbers. In summary, most agencies use a one-year reference period for the activity data on which industry classification is based, the exception being SSA which asks for current activities with no defined reference period. Updating practices vary widely, both within and between agencies. (See Table 1 on page 23, Column B.) 3. other considerations Some data users are troubled by the effects of sudden and/or erratic changes in industry classification, especially when large units are affected. This has led to the application, in some systems, of resistance principles. After a preliminary code has been determined using data from :the current reference period, the preliminary code is compared with codes from one or more previous periods. If the preliminary code differs, from the prior one, it is accepted only if certain threshold conditions are met. Several of the systems studied incorporate resistance principles. There is also the problem of the classification of certain ancillary or auxiliary activities, such as central administrative offices, manufacturers' sales branches, laboratories, and warehouses. Classification of these units is usually based on the activities of the establishments they serve, as specified by the SIC Manual. F. Information Used as Input to Coding Various sources of information are used as input for classification of units by industry within the agency systems covered in this study. The two principal categories are agency source documents, and information other than agency source documents. The latter encompasses prior codes assigned within the same agency and codes from other agencies. The referencing of codes and other information available from commercial sources and contact with the company by phone, correspondence, or in person are also methods of obtaining additional coding information. 1. Agency Source Documents The principal resource for assigning industry codes to units within each system is usually the source documents used by the agency. The reason for this is that the codes from other agencies or commercial business listings may not be fully compatible with the data classification requirements of the 36 receiving system because of differences such as the required level of detail, coding principles, code inaccuracy and whether or not the codes apply to the appropriate reference period. Also, in many situations code transfers are prohibited by law. A study of the source documents used for the different coding systems shows a variation between agencies and in some cases within agencies. Lack of standards in this area could be one reason, but the variation can, in most cases, be justified by the major differences between each agency program's data requirements for the design of their source documents, and whether industry coding is a primary or supplemental consideration in this program. Some factors that an agency must consider in designing the form are the type of information needed in order to obtain the desired level of industry detail, the scope of instructions needed to secure this information, and whether or not the form can be specialized to cover specific industries. It is also necessary to determine whether the forms are to be self coded by the respondent, manually coded by the agency's classifiers or coded by computer. In addition, the burden which completing the form places on the respondent must be evaluated. A. very important factor that should be noted is that often the coding source documents are designed primarily for other purposes. For example, the Form SS-4, which is used as the main coding source for SSA's single unit El coding system, is actually an IRS form utilized by employers and others in applying for an El number. Another case would be the IRS' Statistics of Income coding Systems where tax schedules, such as the Form 1120, are user for industry coding. Coding information is often a minor part of such forms. In contrast, some other agency source documents are specifically designed for the collection of industrial data. These forms may vary from the general purpose type to report forms tailored to a specific industry. Examples, of these latter types of source documents are the various report forms used in the economic censuses. These forms are specialized to the industry which has been determined by codes assigned from previous censuses or surveys, the Company Organization Survey (COS) or Social Security Administration (SSA) records. if a code is not available and the kind of business cannot be determined from the trade name or other reliable information, a more generalized form is sent. In general, the principal difference among the source documents is the nature and detail of coding information available on the various forms used in each agency's system(s). The type of information requested on these forms for determining an industry code ranges from brief descriptions of the principal business activity, or pre-listed industry descriptions and codes for self-selection, to percent distributions of gross sales or 37 receipts by products or services. Specific examples of these varied kinds of information are: (1)pre-listed taxpayer-selected codes such as on IRS Form 1120; (2) pre-listed kind of business activity check boxes (with or without industry codes) on report forms used to classify establishments lacking industry codes prior to mailing industry-specific forms in the economic censuses; (3) respondent- furnished descriptions of principal products or activities based on percent of total sales on BLS Forms 3023-A and 3023-B (of which there are different versions for each industry division); (4) principal business activity on BLS Form SS-4 used in SSA's single-unit EI coding system; and (5) sales distribution by industry on BEA's Form BE-12 used in their Benchmark Surveys. in the absence of an adequate description of the unit's activities, some agency systems may use the trade name as a coding source (e.g., Hilda's Beauty Shop, Bob's Cafe or Johnson's Department Store). This "name coding" is used in SSA's coding of the Form SS-4. The following is a comparative analysis of the level of detail available on source documents. It provides a comparison by level of source information detail based on the chart shown below and gives examples for each category (See Chapter VI for actual source documents and brief description of each). Level of source Category Coding by: information detail A Respondent Not applicable B Agency Low C Agency Medium D Agency High Category A (Selfcoded) -- The only systems which use self-coding (i.e., coding by respondents) almost exclusively are the IRS revenue processing systems for partnerships and corporations. Some forms used in BEA's Direct Investment (DI) Statistics Program also request respondents to enter up to eight 3-digit codes which represent DI industry Classifications under which they have sales. However, final code determinations are made and entered on the forms by BEA coders. Bureau of the Census forms, especially in the retail anti wholesale trade and service areas, also frequently utilize pre-listed, respondents elected descriptions and codes. In most cases, responses to these items are checked against other data furnished on the form in order to determine what industry code to assign. The source documents for the above mentioned IRS systems are the appropriate tax return forms for these two categories of taxpayers. The relevant data items and instructions from the partnership return (IRS Form,1065) for tax year 1981 are shown as Exhibit 1, Chapter VI. The "Business Code Number" is to be 38 entered by the taxpayer in Item C on the first page, using the instructions and code list on page 12 of the 4nstructions. The code list provides a short description for each of the industries included by IRS along with the appropriate codes. Taxpayers are also asked to give a brief description of their principal business activity and principal product or service in Items A and B, respectively. This information is used very little in revenue processing, but to a greater extent in the Statistics of income industry coding. An observed feature of self-coding is the potential for a high proportion of incorrect codes immediately following a revision of the Standard Industrial Classification. Some evidence on this score is presented in Chapter IV. Category B (Agency coded, low detail) -- The example for this category is also taken from IRS. Exhibit 2 of Chapter VI shows the relevant data items and instructions from the 1981 tax return schedule used for non farm sole proprietorships (IRS Form 1040, Schedule C). The primary data items used for coding are Item A, a two-part item calling for brief descriptions of the "main business activity and its "product" and Item B, the business name. The instruction for Item A is to "Report the business activity that accounted for the most income...Give the general field as well as the product or service. For example, "wholesale-groceries' or 'retail-hardware,." For some returns, additional clues to the correct classification may be found by examining other parts of the return, e.g., the kinds of expenses (deductions) reported in Part 11 and the kinds of property listed in Schedule C-2, Depreciation. Note, however, that taxpayers are not required to show a breakdown of receipts or sales by source, so there is no way even to check that the main activity has been properly identified, let alone to apply the more complex rules that are used for some combinations of activities. It may be noted in passing that IRS Form 1040, Schedule F and Form 4385, which are used for farm sole proprietorships, do require a breakdown of sales or income from different kinds of crops and livestock production. This is probably sufficient to put these source documents in Category D. Other source documents classified as providing a low level of input detail were certain ones used by the Census Bureau as a preliminary to more precise coding of later documents based on the economic censuses or current surveys. Category C (Agency coded, medium detail) -- The main example for this category is the Form SS-4 (Application for Employer Identification number). The complete Form SS-4 and the relevant section of the instructions for it appear as Exhibit 3 of Chapter II. This is an IRS form Used by SSA to classify all employers for the single-unit employer file. (Codes for 39 establishments or reporting units of multi-unit employers are based on a more detailed form which is sent to eligible employers following receipt of the initial application.) The primary data item used for industry classification is Item 14, Nature of Principal Business Activity. The instructions for this item give examples of the kinds of descriptions desired for various SIC divisions. other items which may assist in classification are: Items 1 and 4 -- Name and Trade name. Item 10 -- Type of organization. Item 16 -- Breakdown of employees by type. Item 17 -- For manufacturers, principal product and raw material used. Item 18 -- To whom does the employer sell most of his or her products or services. These items, especially 17 and 18, cover certain of the key data requirements needed for classification that were not covered in the Category B example. The Form SS-4 is classified in the medium rather than high detail category primarily because it does not provide any breakdown of multiple activities. Several earlier versions of the SS-4 did include an item asking manufacturers to list their three principal products and to give the percentage of total value of products represented by each of these. Category D (Agency coded, high detail) -- Within this category, the amount of detail and the general approaches used vary, so it will he useful to give more than one example. The source documents which provide the most information for industry coding are the mail questionnaires used in the quinquennial economic censuses. These questionnaires call for detailed information and are tailored to different groups of SIC industries hence they include the specialized inquiries needed to assign industry codes within those groups. Special procedures are, of course, needed to handle questionnaires returned by establishments which are inappropriate to their activities. Exhibit 4 of Chapter VI shows one questionnaire for the 1982 Census of Retail Trade -- Tires, Batteries, Parts, Accessories, (Form CB-5502). This questionnaire was mailer to establishments believed to be in Census industry and Product Classification categories 553110 (tire, battery and accessory dealers) and 553120 (other auto and home supply stores). The "mailout" code, i.e., the latest IPC code for that unit from the Standard Statistical Establishment List (SSEL), will appear on the mailing label. A "self- designated" code will be determined on the basis of the respondent's entry in Item 9, Kind of Business. Normally, the final IPC code will be computer- 40 assigned, based primarily on the merchandise lines data (Item 11), but also taking into account other relevant items on the form, including dollar volume of business (Item 5), class of customer (Item 7), method of selling (Item 10) and a specific inquiry on sales and receipts from retreading tires (Item 12a). The mailout and self-designated codes enter into the final code determination only when the data for the items normally used are incomplete, ambiguous, or contradictory. Other forms that provide a high level of information for industry coding are BLS Forms 3023-A (Industry Classification Statement) and 3023-B (Industry Verification Form), which are designed for each industry and used for updating all industry codes. They are also used to update area, type of ownership, and auxiliary codes of existing units covered by the Unemployment Insurance Employment and Wages (ES- 202) Program on a three-year refiling cycle. Form BLS 3023-A is used sometimes by the state agencies to clarify or obtain additional information necessary to assign SIC codes to new employer accounts. For both forms, there are separate versions for each industrial division (including an " all industry" version). Each form also provides for the inclusion of other establishments reported by a multi unit company. Exhibit 5 of Chapter VI shows BLS Form 3023-A7 (Rev. Dec. 1982), which is one of the forms used to update industry codes for reporting units currently classified in wholesale trade. Unlike other examples discussed in this section, this form is designed primarily to get the information needed for classification of the report unit. The key items on the form for this purpose are items B, D and E. Item B covers the identification of multiple products or activities of the reporting unit, and the percent of total sales (value of receipts) accounted for by each during the most recent calendar year. Item D identifies Central Administrative offices (CAO'S) and auxiliary units, and item E asks for the principal class of customer, as an aid to determining whether the unit is wholesale or retail. A final example in this category comes from the Federal Trade Commission's (FTC) Quarterly Financial Report (QFR) Program. (This program was transferred to the Bureau of the Census in late 1982.) Exhibit 6 of Chapter VI shows FTC Form 59-103 (rev. Oct. 1979), Nature of Business Report. The FTC uses two versions of this form, the one shown, which is for the manufacturing division, and a second version for the other SIC divisions included in the QFR Program (mining, wholesale trade and retail trade). The Nature of Business Report is sent to all corporations which are about to enter the QFR sample for initial determination of status, and, for updating purposes, to certain corporations reentering or remaining in the sample. Like the BLS Form 3023, its primary purpose is to classify the reporting units by industry. in addition, several questions are asked to determine the current corporate structure of the reporting unit. 41 The key item on the form is item 3, n which the respondent is asked to list products made, processed or assembled and/or sold, with the percent share of gross receipts accounted for by each. in addition, information is requested on kinds of raw materials used and processes used in production. Unlike the BLS form, this form does not provide any illustration of the level of detail desired in distinguishing different product categories. 2. Information Other than Agency Source Documents As stated earlier, most agencies rely primarily on their own source documents as input to their coding systems. However, in certain situations they may resort to other coding sources such as additional contact with the company, prior codes assigned to the same units within their own agency codes supplied by other agencies, and codes and other pertinent information extracted from commercial sources. The prior codes assigned by an agency are used for various purposes. Listed below are some of the uses and examples of agency systems to which these situations apply. --- Report form selection. During the economic censuses the Census Bureau utilizes prior codes as a selection factor in determining the appropriate form to be mailed. -- Reference for manual editing. Many of the agency coding systems reference prior codes during updating processes for purposes of reviewing code changes, determining accuracy of current codes and making final code determinations. For example, prior codes for permanent sample units in FTC's Quarterly Financial Report (QFR) are available to the coders for determining code changes for large corporations. Codes supplied by other agencies are also used for various purposes. Some of these are listed below with examples. -- Report form selection. The Census Bureau uses industry codes from SSA records if no previous Census assigned codes are available to determine the appropriate report form to mail in the economic censuses. -- Coding of nonrespondents, and establishments not included in the mail part of the economic censuses. IRS Principal Industrial Activity (PIA) and SSA assigned codes are two of the various sources used by the Census Bureau for determining an industry code for these cases in the economic censuses. 42 -- Coding of units with incomplete data. The Census Bureau references SSA assigned codes when classifying cases with insufficient information in the business births coding system. -- Updating procedures. The Social Security Administration attempts to update its code files every five years through a coordination with census records based on codes resulting from the economic censuses (especially following a major SIC revision). The last such update was based on the 1972 Economic Censuses. Other sources of coding information are commercial business listings (e.g., Dun and Bradstreet, Moody's, Thomas Register). many agencies use these as a source when there is insufficient information to assign a complete industry code to a unit. Some examples of the different agency coding systems which utilize these references are: (1) business births coding (Census), (2) single-unit EI file (SSA), (3) Company organization Survey (Census), (4) economic censuses (Census), (5) Quarterly Financial Report (FTC), and (5) Statistics of Income -- Corporations (IRS). The final coding source (and indeed the first and preferred source for large establishments and firms) by which an agency may obtain coding information for a unit when there is insufficient information is through additional contact with the company by phone, written correspondence, or in person. This is done for most of the systems and, as a case in point, for the Unemployment Insurance (UI) Employment and Wage Program (Bureau of Labor Statistics). Here the State may send a BLS-3023 form (for new accounts), contact the employer by phone or make a personal visit in order to obtain the needed information. The wide variation among the coding sources used by the various agencies affects the uniformity of codes assigned to the same units in different systems. Greater standardization of the coding systems in this area would seem feasible at this time, but only for agencies which have similar data requirements and have the resources needed to code at the agreed level of detail. G. Coding Procedures The procedures developed for use within the different coding systems encompass a variety of activities. These include: - The methods by which the industry codes are assigned (i.e., manual, computer-assisted, automated). - Treatment of missing data. - Data entry. 43 - Quality assurance procedures (i.e., manual quality control and computer consistency checks). The following provides descriptions of procedure types available under each of these functions and examples of how they are used. It shows that wide variations exist between the procedures for the systems studied. The fact that these differences will affect the comparability of codes between agencies is self-evident. 1. Methods of assigning codes. There are three principal methods by which the initial industry codes are assigned. Of these, manual coding is the most frequently used. The other methods used are "automated coding" and "computer-assisted coding," which is also a form of manual coding. At this time the Census Bureau is the only agency which makes use of "computer assisted coding." Listed below are basic descriptions of the procedures which apply to each of these methods: -- Manual Coding. Under this method the classifier manually assigns an industry code directly to the source document (or other form used for data entry purposes) based on information supplied by the respondent and other available sources such as commercial references or prior codes. -- Computer-assisted Coding. This system was developed by the Census Bureau to assist the coder during manual operations by computerizing the basic coding routine. This system is being used in several phases of the 1982 Economic Censuses processing. Under this method, the coder, who is working at an interactive computer terminal, is first required to select the major SIC division which relates to the activity description and/or trade name supplied on the source form. Then the coder selects a "key word" based on the same information and enters it into the terminal. it possible, the system matches the "key word" to one or more verbal descriptions of SIC industries. These industry descriptions are then displayed, with their associated code, for the coder to select the description and code which is applicable. If the coder is unable to assign a code at this point, the system will then direct the coder through several routines until a code is derived. If this fails the case is referred to an analyst for review. In addition to its coding functions, this method was also developed to improve the training of 44 coders, increase consistency, and provide a flexible mechanism for continuous updating of descriptions and codes in the system and IpC Manual. it is also the first step towards a fully automated system of coding through the development of a comprehensive dictionary of industry descriptions. -- Computer/Automated Coding. Currently no coding system studied by the Working Group is fully automated; however, two agencies (Census Bureau and IRS) are using largely automated coding procedures. within the Census Bureau systems (e.g., the mail portion of the economic censuses, Census of Agriculture for farms with sales of $2,500 or more and other periodic surveys such as the Annual Survey of Manufactures) which have implemented this method, this is done by using computerized data on receipts or sales by type of product or service to assign and place in the records for each unit an industry code, according to a programmed set of rules. Starting with tax year 1981, IRS's SOI programs have used largely automated procedures for generating current year Soi codes. Procedures vary by type of return and tax year. For most returns, the automated coding process derives the current year SOI code either from the prior year SOI code or from the current year revenue processing code. Manual coding is used only on an exception basis. The following lists the agencie