1 UK Service Industries: definition, classification and evolution Jacqui Jones Office for National Statistics Section 1: Introduction Industries classified to services now contribute more to the UK economy than any other industry. Over time, their contribution has increased from an estimated 46% in 1948 to 78% in The increasing economic contribution from service industries has simultaneously seen decreases in the production and agriculture industries, with production experiencing the largest decrease in its contribution to the UK economy, from an estimated 42% in 1948 to 15% in In contrast, since 1948, the contribution of construction industries has remained relatively stable at between 6% and 7%. Over the decades, the service industries have changed. To keep pace with these changes, the industry classification has been reviewed and updated. This hierarchical classification provides an essential framework to ensure a common language for both the compilation and presentation of statistics, by acting as the basic instrument for categorising phenomena of the real world. In the UK, official statistics classify industries using the UK Standard Industrial Classification of Economic Activities (UKSIC), which is legislatively aligned to international classifications. Under European regulation all statistics involving industrial classification produced by European Union (EU) member states must be compiled using the standard classification system. Examples include national accounts, structural business statistics and short term statistics. Member states are, however, allowed national versions of the classification if they fit into the structural and hierarchical framework of the European classification and are approved by the European Commission. The objective of this paper is to provide an overview of: How the service industries are defined and classified to UKSIC. How UKSIC has changed over time. Registered and unregistered businesses. The evolution of the UK service industries. A companion to this paper is Coverage and Measurement of E commerce, which will be published on 6 September 2013.
2 Section 2: Key points from the paper 2.1 Defining and classifying the service industries To keep pace with economic changes, the international aligned UKSIC has been reviewed and updated seven times since it was established in In official statistics, different business structures are recognised and classified as statistical units, according to internationally agreed definitions (see tables 3 and 4). This is based on each unit s principal activity, which is the activity contributing the most to the total value added of that unit. To ensure that the value added of unregistered businesses is included in the measurement of GDP, adjustments are made as part of the annual national accounts Supply and Use balancing process. Estimated unregistered business adjustments are made at a detailed classification class level and vary by industry (see Section 4). 2.2 Evolution of the UK service industries (see Section 5) In 1948, UK service industries contributed an estimated 46% to UK gross domestic product (GDP), and by 2012 this had increased to 78%. In contrast, the production industries declined from an estimated contribution of 42% in 1948 to 15% in 2012 and the agriculture industries declined from an estimated contribution of 6% in 1948 to less than 1% in Since 1948, construction industries have remained relatively stable in their contribution to the UK economy, at between 6 and 7%. Across the services, production, construction and agricultural industries, the highest percentage point (pp) changes between 1948 and 2012, were in manufacturing and insurance, banking and real estate, with manufacturing declining by 25.6 pp and insurance, banking and real estate increasing by 14.1 pp. The percentage of people employed in service industries was estimated to have increased from 44% in 1948 to 85% in In contrast, the percentage of people employed in production industries was estimated to have decreased from 45% in 1948 to 10% in 2012 and the percentage employed in agriculture industries decreased from 5% in 1948 to less than 1% in Similar to its economic contribution to the UK economy, the percentage employed in construction industries remained fairly stable but declined by an estimated 2.4 pp between 1948 and One of the striking differences between industries employment and contribution to GDP can be seen in the insurance, banking and real estate industry. Comparing 1948 with 2012, the number of people employed in this industry increased by only an estimated 3 pp; however, from a contribution to GDP perspective, comparing 1948 with 2012 the insurance, banking and real estate industry increased by 14.1 pp. Much of the increase in the proportion of people employed in these industries occurred between 1948 and the late 1970s, with the later changes in the proportion of GVA being due to increasing productivity as the industries have fundamentally changed.
3 Section 3: The Services Industries 3.1 Defining service industries Service industries comprise businesses whose principal activity (the activity contributing the most to the unit s total value added) is to provide service products. Under European definitions: Service products are entities over which ownership rights cannot be established. They cannot be traded separately from their production (Eurostat, 2009, p. 2). Businesses in service industries are involved in activities such as retail, transport, distribution, and accommodation and food. At a European level these activities are defined in relation to the Statistical Classification of Economic Activities in the European Community (NACE); by European legislation UKSIC is updated and aligned to NACE. Table 1 provides an overview of the UKSIC 2007 sections, included in the service industries. Table 1: UKSIC Sections included in the service industry Components of the Service Industries as represented in the Index of Services Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific and technical activities Administrative and support service activities Public administration and defence; compulsory social security Education Human health and social work activities Arts, entertainment and recreation Other service activities Activities of households as employers UK SIC Section G H I J K L M N O P Q R S T 3.2 The Standard Industrial Classification What is the UK Standard Industrial Classification? UKSIC was introduced in 1948 as a classification system for classifying business establishments and other statistical units by the type of economic activity in which they are engaged. UKSIC is aligned to the United Nations International Standard Industrial Classification of all Economic Activities (ISIC) and at the European level to NACE (further information on these classifications can be found in Jones and Hidiroglou, pp ). UKSIC provides a framework for the collection, tabulation, presentation and analysis of data, and its use promotes uniformity. In addition, it can be used for administrative purposes and by nongovernment bodies as a convenient way of classifying industrial activities into a common structure.
4 UKSIC is a hierarchical classification system structured by sections, divisions, groups, classes, and in some instances subclasses. Table 2 provides an extract of the UKSIC structure for Section J: Information and Communication. Table 2: UKSIC 2007, extract of the UKSIC structure for Section J: Information and Communication Division Group Class Description and Subclass 58 Publishing activities 58.1 Publishing of books, periodicals and other publishing activities Book publishing Publishing of directories and mailing lists Publishing of newspapers Publishing of journals and periodicals 58.14/1 Publishing of learned journals 58.14/2 Publishing of consumer, business and professional journals and periodicals Other publishing activities 58.2 Software publishing Publishing of computer games Other software publishing 59 Motion picture, video and television programme production, sound recording and music publishing activities 59.1 Motion picture, video and television programme activities Motion picture, video and television programme production activities Etc. UKSIC is used as the industrial classification system for classifying businesses to industrial sections, divisions, groups, classes and subclasses on the Inter Departmental Business Register (IDBR), which is used as the business survey sampling frame in the Office for National Statistics (ONS) and some other Government departments How the UK Standard Industrial Classification has changed overtime To ensure industrial classifications keep up to date with economic changes, international, European and national industrial classifications are periodically reviewed. Since 1948 UKSIC has been updated in 1958, 1968, 1980, 1992, 1997, 2003 and The latest UKSIC classification review, in 2007, substantially increased the classification detail to reflect different forms of production and emerging new industries. The previous version of UKSIC (2003) had 17 sections and 62 divisions; UKSIC (2007) has 21 sections and 88 divisions (ONS, 2009). The detail of the classification in UKSIC 2007 was substantially increased especially for serviceproducing activities. For the service industries five new sections were introduced: - Section J: Information and Communication - Section L: Real Estate Activities - Section M: Professional, Scientific and Technical Services - Section N: Administrative and Support Services - Section R: Arts, Entertainment and Recreation The introduction of Section J (Information and Communication) in the 2007 UKSIC was a major change. It contains 26 four digit level classes and pulled together service activities previously
5 dispersed across the industrial classification system. These include publishing, motion pictures and sound recording industries, broadcasting (radio and TV industries), telecommunications, Internet activities and other new services. 3.3 How businesses are classified to the service industries Nowadays more and more businesses perform more than one type of activity. For example, supermarkets often sell clothes and household goods as well as food; they also may sell services such as insurance and provide banking services. The variety of types of activities provides an industrial classification challenge of classifying businesses according to their principal business activity as laid down in international guidance. From both a sampling and administrative data perspective, businesses need to be classified to an industry. The structure of businesses can vary, for example: global businesses, with offices located in different countries; multi site businesses located in one particular country; and single site businesses. In official statistics, different business structures are recognised and classified to statistical units, according to internationally agreed definitions (see tables 3 and 4) as described in the Council Regulation on statistical units. Further information on classifying business can be found in Smith (2013) pp , and United Nations (2007). Statistical units formed from registered businesses (i.e. businesses registered for Value Added Tax (VAT) and/or Pay as You Earn (PAYE)) are included on the central business survey sampling frame (for the UK this is the ONS IDBR) and coded to an industrial section, division, group, class and subclass. Table 3: Business statistical units Type of Unit Enterprise Local unit (or establishment) Enterprise group Description A business under autonomous and single control, usually producing a single set of accounts. A single site (geographic location) where a business operates. A group of enterprises under common ownership. Additional types of business units less commonly used in practice, as they are more difficult to correctly identify, are: Table 4: Additional business statistical units Type of Unit Kind of activity unit Local kind of activity unit Description All the parts of an enterprise undertaking a single activity according to a classification system. A single activity taking place in a single geographic location (i.e. a local unit or subdivision of it). According to international guidance, each statistical unit on the business register is classified to UKSIC by their principal activity which is: the activity which contributes most to the total value added of that unit (ONS, 2009).
6 The statistical unit may be an enterprise, local unit, kind of activity unit or local kind of activity unit. Each statistical unit must, however, be a specific entity that cannot be confused with any other statistical unit. Accurately recoding the value added of each statistical unit is challenging from a measurement, collection and maintenance perspective. International guidance recognises this and allows for the use of other indicators as an approximation for value added such as employment and turnover. In the ONS IDBR the principal activity is based on employment where there is a local unit present or PAYE record; if only registered for VAT, the principal activity is determined from VAT data. Once a statistical unit has been identified it is allocated a UKSIC code based on its principal activity. The information used to code statistical units to UKSIC comes from a variety of sources such as: Her Majesty s Revenue and Customs (HMRC) business descriptions from VAT data. HMRC Pay as You Earn data. Companies House descriptions from company registrations and annual accounts. The ONS annual Business Register and Employment Survey. ONS business profiling team. Ensuring and maintaining the accuracy of the IDBR is essential to the production of official economic statistics. IDBR maintenance is therefore regularly undertaken to review statistical units and their UKSIC codes. UKSIC codes are allocated using either automatic or manual coding (see Jones and Hidiroglou, 2013, pp ). For manual coding, decision trees are used to inform the correct allocation of codes. Figure 1 below represents the decision tree for the allocation of a retail statistical unit to a specific class in division 47 Retail trade. First, the retail statistical unit must be classified into in store or not in store (e.g. mail order, catalogues or online). Once this has been established, further decisions are taken on the type of retail activity (e.g. stores selling food predominantly or specialised stores such as department stores).
7 Figure 1: UKSIC, Retail Trade decision tree Retail trade (Division 47) In stores Not in stores Specialised Non specialised 47.1 Food predominating Other Via stalls & markets 47.8 Others 47.9 Note: further subdivisions are made according to products. Section 4: Registered and unregistered businesses The ONS IDBR, used as the sample frame for ONS and some other government departments business surveys, includes all UK businesses registered for either Value Added Tax (VAT) or Pay As You Earn (PAYE). In March 2012, the registered business population was estimated to be 2.15 million enterprises, compared with 2.08 million in March ,000 of the 68,000 increase was due to improvements to HMRC computer systems, whereby previously registered businesses had not been included (ONS, 3 October 2012). In contrast, the estimated number of unregistered businesses was higher than registered businesses. At the start of 2012, there were an estimated 2.7 million unregistered businesses. Between the start of 2011 and 2012, estimates of unregistered businesses increased by 170,000. Most of the increase was from an increase in unregistered sole proprietorships, which increased by 161,000 (Department for Business, Innovation and Skills (BIS), 17 October, 2012). Unregistered businesses (e.g. smaller non employing businesses including a large proportion of self employed sole proprietors and partnerships) are not easily identifiable in administrative systems. It would therefore be difficult to maintain a register of unregistered businesses to be used as a sampling frame. Including unregistered businesses in surveys would also pose an additional burden on them. To overcome this issue and to ensure that the value added of unregistered businesses is included in the measurement of GDP, adjustments are made as part of the annual national accounts Supply and Use balancing process. These adjustments are based on periodic analysis using additional data from HMRC and use assessments of turnover by businesses not covered by the IDBR to estimate under coverage of output, intermediate consumption and gross value added.
8 The analysis is undertaken at the detailed UKSIC class level and adjustments are aggregated and applied to unbalanced Supply and Use industry data at the UKSIC or 3 digit level; this is because individual industries have different proportions of unregistered businesses. To ensure that these adjustments are kept up to date, ONS is currently repeating the analysis of unregistered businesses; any changes will be included in the UK National Accounts Blue Book Tables 5 and 6 show examples of the largest and smallest unregistered business industry adjustments, the figures represent the percentage uplifts applied to both market sector industry output and intermediate consumption data from the Annual Business Survey during the Supply and Use process. The contribution of the adjustments to final balanced estimates of output and intermediate consumption and hence gross value added can vary due to other coverage, conceptual and coherence adjustments applied later on during the balancing process. Table 5: Examples of industries with high contributions from unregistered businesses (based on Supply and Use analysis) Industry Estimated missing output and intermediate consumption from unregistered businesses (%) Land transport services and transport services via pipelines, 17.3 excluding rail transport 59 Motion picture, video and TV programme production services, 7.3 sound recording & music publishing 93 Sports services and amusement and recreation services Other personal service activities Food and beverage serving services Accommodation services 4.8 Table 6: Examples of industries with low contributions from unregistered businesses (based on Supply and Use analysis) Industry Estimated missing output and intermediate consumption from unregistered businesses (%) 53 Postal and courier services Motor vehicles, trailers and semi trailers Manufacture of grain mill products, starches and starch products Extraction of crude petroleum and natural gas Manufacture of alcoholic beverages 0.0 In the estimation of GDP, what is more important is not the number of unregistered businesses but the value of their economic activity. In relation to some speculation that the contribution of unregistered businesses has increased since the financial crisis, BIS estimates show relatively stable proportions of unregistered business turnover to total turnover between 2006 and 2012 (see Table 7). Any under coverage will most probably impact on GDP levels rather than GDP growth. It should also be noted that GDP in 2012 was an estimated 1,560 billion.
9 Table 7: Number and proportions of unregistered businesses and their turnover At the start of year Estimated total number of businesses (million) Estimated number of unregistered businesses (million) Unregistered businesses as a proportion of all businesses % Estimated value of unregistered business turnover ( billion) Estimated unregistered business turnover as a proportion of all business turnover % % % % % % % 101 See note 3.1% % 88 below 2.7% % % % % Source: BIS Note: turnover estimates after 2009 are not strictly comparable to the earlier estimates improved methodology used for estimating the number of unregistered businesses was introduced in 2010 and it has only been possible to update the historical series for the number of businesses, which was reduced by about 400,000 when the methodology changed. Section 5: Evolution of the UK service industries The UK, like many other countries, has seen a progressive change in the industrial makeup of its economy, with increasing contribution from the service industries. Figure 2, shows how the services, production, construction and agricultural industries have evolved from 1948 to 2012 in their contributions, by weight, to UK GDP. Figure 2: UK GDP industry weights (%), 1948 to Total services Total Production Total Construction Total Agriculture Source: 1948 data were sourced from National Income and Expenditure ; Gross national product at factor costs by industry of origin table data were sourced from National Income and Expenditure 1979 edition. Gross domestic product by industry table and 2012 data were sourced from Blue Book 2013, gross value added. What is evident from Figure 2 is the increasing economic importance of the service industry to the UK economy. In 1948 the service industry contributed an estimated 46% to UK GDP, and by 2012 this had increased to 78%.
10 In contrast the production industry declined from an estimated contribution of 42% in 1948 to 15% in 2012; and the agriculture industry declined from a contribution of 6% in 1948 to less than 1% in 2012 The contribution of the construction industry experienced very little change between 1948 and 2012; in both 1948 and 2012 it contributed an estimated 6% to the UK economy. Figure 3 provides a more detailed view of changes within the broad service, production, construction and agriculture industries. It shows that the highest estimated percentage point (ppt) change between 1948 and 2012, were in manufacturing and insurance, banking and real estate, with manufacturing declining by 25.6 ppts and insurance, banking and real estate increasing by 14.1 ppt. Figure 3: Contribution to UK gross value added by industry, 1948 to 2012 % Note: The twelve categories were created based on the broad industry groups in For the other years, data have been taken and placed in these categories. Source: 1948 data were sourced from National Income and Expenditure ; Gross national product at factor costs by industry of origin table data were sourced from National Income and Expenditure 1979 edition. Gross domestic product by industry table and 2012 data were sourced from Blue Book 2013, gross value added. 5.1 Service industries employment As the economic importance of the service industries has increased, so has their contribution to the labour market (see Figure 4). From Figure 4 it can be seen that the percentage of people employed in the service industries (excluding self employed) increased from 44% in 1948 to 85% in In contrast, the percentage employed in the production industries decreased from 45% in 1948 to 10%
11 in 2012 and the percentage employed in the agriculture industries decreased from 5% in 1948 to 1% in Similar to its economic contribution to the UK economy, the percentage employed in the construction industry remained fairly stable but declined by an estimated 2.4 pp between 1948 and Figure 4: Percentage of people employed in the service, production, construction and agriculture industries ( ). 100 % Total services Total Production Total Construction Total Agriculture Source: 1948 data were sourced from the Annual Abstract of Statistics, ; estimated number of insured employees at July 1948 table data were sourced from the Annual Abstract of Statistics 1984; employees in employment at June 1978 table and 2012 data were sourced from estimates of work force jobs. Figure 5 shows the estimated percentage of employees in June 1948, 1978, 2008 and Comparing 1948 with 2012, the manufacturing industry had the largest decline in percentage employed (30%); in contrast, industries such as wholesale and retail trade and other services increased by 5% and 17% respectively. One of the striking differences between industries employment and contribution to GDP (Figure 3 and 5) can be seen in the insurance, banking and real estate industry. Comparing 1948 with 2012, the percentage of people employed in this industry increased by only an estimated 3 pp; however, from a contribution to GDP perspective, comparing 1948 with 2012, the insurance, banking and real estate industry increased by 14.1 pp. Much of the increase in the proportion of people employed in these industries occurred between 1948 and the late 1970s, with the later changes in the proportion of GVA being due to increasing productivity as the industry has fundamentally changed.
12 Figure 5: Percentage of people employed in June 1948, 1978, 2008 and 2012 % Note: The twelve categories were created based on the board industry groups in For the other years, data have been taken and placed in these categories. Note: Early data on the number of insured employees may not be strictly comparable to later years that use number of employees. Source: 1948 data were sourced from the Annual Abstract of Statistics, ; estimated number of insured employees at July 1948 table data were sourced from the Annual Abstract of Statistics 1984; employees in employment at June 1978 table and 2012 data were sourced from estimates of work force jobs. As the industrial structure of the economy has changed, ONS has kept pace with these changes by, for example, developing and publishing the Index of Services (Drew and Morgan, 2007); enhancing the International Trade in Service Survey, most recently to comply with Balance of Payments Manual 6 changes; and looking for new data sources for example, the measurement of digital services. Section 7: Concluding comments This paper has provided an overview of the service industries, how businesses are classified to the service industries, estimation of unregistered businesses, and looked at how the service industries have evolved in the UK economy. With respect to the production of official statistics, what is important is that: businesses and statistical units are correctly identified and coded to UKSIC in line with international guidance: these classifications continue to be updated and: ONS continues to accurately measure the contribution of the service industries to the UK economy.
13 Acknowledgements I would like to thank the following ONS people for their contributions to this paper: Stacey Chamberlain, Darren Morgan, Robert Doody, Rich Wild, Lindsay Prosser, Pete Lee, Emily Carless and David Howell. Thanks also to Dave Hayward who created the infographic to accompany this article. References Council Regulation (EEC) No 696/93 of 15 March 1993 on the statistical units for the observation and analysis of the production system in the Community (OJ No L 76, , p. 1). Department for Business Innovation & Skills, (17 October 2012), Business Population Estimates for the UK and Regions, 2012, BIS. Drew, S. & Morgan, D. (2007) The launch of the index of services as a national statistic, ONS, Economic and Labour Market Review, Eurostat (2009) CPA 2008 Introductory Guidelines, Office for Official Publications of the European Communities, Luxembourg. Jones, J. and Hidiroglou, M. (2013) Capturing, Coding and Cleaning Survey Data, in Snijkers, G., Haraldsen, G., Jones, J. and Willimack, D. K. (2013) Designing and Conducting Business Surveys, Wiley, pp Office for National Statistics (2009) UK Standard Industrial Classification of Economic Activities 2007 (SIC 2007): Structure and explanatory notes, Palgrave Macmillan. Office for National Statistics (3 October 2012) UK Business: Activity, Size and Location, Smith, P. (2013) Sampling and Estimation in Business Surveys, in Snijkers, G., Haraldsen, G., Jones, J. and Willimack, D. K. (2013) Designing and Conducting Business Surveys, Wiley, pp Office for National Statistics (2013) UK National Accounts Blue Book, Office for National Statistics. United Nations (2007), Statistical Units, United Nations, Department of Economic and Social Affairs, Statistics Division, New York.