The Structure of U.S. Manufacturing: a Technological Perspective 1

Understanding the structural relationship of production technologies across manufacturing industries is vital for analyzing dynamic economic activity because firms and establishments often change industries in response to economic conditions. Most researchers use the Standard Industrial Classification (SIC) system, with its hierarchical 2, 3 and 4-digits, to identify these changes and build the underlying relationships across industries. However, as discussed in Andrews and Abbott (1988), the SIC is replete with problems, including the lack of an single, overall guiding principle for the classification.

This paper expands on our exploratory work using clustering techniques in Abbott and Andrews (1990). It builds on the idea of using continuous measures of technological distance between industries and establishments based on their production technologies. As illustration, we develop distance measures between existing 4-digit industries and show what an “optimal” hierarchical structure might look like using these methodologies.

While this approach yields results which are similar to the SIC, there are important differences between the two classifications in terms of the industrial categories which emerge and the amount of information lost in the process of aggregation. Thus, we feel justified in concluding that a lot can be learned about the dynamic interactions between firms and establishments by looking at industry and establishment classification in a less rigid fashion.