The nail file: the economic meaning of manicures.

Remember the Great Depression of 1995? The New York Times consumed a zillion column inches - the most since the Pentagon Papers - chronicling economic disaster and "unrelenting angst." The Downsizing of America, the book version of that seven-part series, declared America a Dickensian hell, analogous to "when the peasants in England were shunted off the land and left to toil in misery in the slums." Pat Buchanan and Jeremy Rifkin shattered Crossfire's left-right conventions, agreeing that technology was destroying the job hopes of everyone but a few elitist nerds. Once the presidential campaign kicked in, political reporters couldn't get enough of Buchanan's populist economic platform. They knew it would sell - until voters humiliatingly shunned it in Arizona and South Carolina.

The voters knew something reporters missed: America was a land not of misery but of economic vitality and resilience. That's easy to see now, amid low unemployment and steady, noninflationary growth. But there was no recession two years ago. Why did so many pundits and reporters go so wrong? What blinds so many smart people to what's happening all around them?

One answer is psychological bias: "The economy" is too big and complicated to comprehend, so we overemphasize "typical" jobs and industries - the ones we see on TV. If those jobs change, or those industries shrink, we mistake turbulence for doom. And even in relatively good times, we can't imagine how the economy can possibly create enough openings to absorb future workers. "Not everyone can be a computer programmer" is the rallying cry of the gloom mongers. It's a good slogan, because programming has come to symbolize the job of the future and because, in fact, not everyone can be a programmer. An economy of high-tech knowledge workers will leave a lot of people behind.

But with all due respect to Silicon Valley, one of my favorite places, that's not all there is to the U.S. economy. So I would like to add another California-based growth industry to our set of touchstones, one that captures most major trends in American economic life: nail salons.

Twenty years ago, manicurists mostly worked in obscure corners of hair salons or catered to the wealthy. Cher got her nails done; the rest of us did not. Today, free-standing nail salons dot the commercial blocks and strip malls of cities from Southern California to South Carolina. Nails magazine pegs the market at $6 billion in 1996 for salon services alone, up from $5.2 billion a year earlier. About 239,000 people work as "licensed nail technicians." (By way of comparison, the Business Software Alliance counts about three times as many people employed in the software industry.)

That's the industry hidden in plain sight. There's also the business you don't see as you walk down the street: the manufacturers and distributors that supply the salons. Nailpro, another trade magazine, lists nearly 400 manufacturers in its 1997 Gold Book directory. These companies make everything from polishes, nippers, and acrylic nail-sculpting compounds to manicure tables, polish racks, and toeless pedicure socks. Says Nailpro Executive Editor Linda Lewis, with little exaggeration, "Everything you see in that Gold Book was developed over the last 20 years." Nail salons aren't the biggest business in America, but they're a growth industry that sprang up without much notice.

The first lesson they teach is: Take government statistics with a shaker of salt. The Bureau of Labor Statistics will tell you that "manicurist" is a fast-growing profession - impressively so for a job the BLS didn't even track in 1979. It claims there are 35,000 manicurists, a number it projects will grow to 55,000 by 2005. Now this is a business that supports three trade magazines, including Saigon Nails in Vietnamese; Nails alone has a circulation of 55,000. It is also a licensed occupation in all but a few states, and the licensing boards track active nail techs, which is where that 239,000 figure comes from. The BLS head counters have misplaced an awesome number of jobs. If they can be that wrong about licensed manicurists, imagine what they can do with gardeners, car washers, or nonunion construction workers.

Second, serendipity and synthesis drive economic development, making new industries hard to predict. Easily used acrylic systems made stand-alone nail salons possible: Occasional manicures can't support a separate business, but acrylic nails cost more and require routine maintenance. (The appeal of acrylics is that they repair bitten nails and deter nail biting, make nails smooth and even, and hold polish better than natural nails. And for those inclined to the dragon lady look, they can also be very, very long.) Artificial nails account for two-thirds of salon revenue.

Modern acrylics were invented not by a cosmetics company but by a dentist with a knack for chemistry. Catching a familiar smell as Dr. Stuart Nordstrom made her a temporary crown, a patient griped about the similar compounds she used as a manicurist to fashion fingernails. An inventive fellow, Nordstrom fooled around in his garage lab and came up with better compounds, founding Creative Nail Design Systems in 1978. Its products and training courses, along with other innovators' improved glues and plastic nail tips, helped propel the industry's growth.

Better acrylics were necessary to build the nail business, but they were not sufficient to make it explode. That took the phenomenon veteran nail techs hate most - discount salons. The business is easy to get into: A license typically takes no more than 400 hours of schooling, and opening a shop requires just a few thousand dollars. Fierce competition was inevitable.

It came in the 1980s, as Southern California's large community of Vietnamese immigrants discovered the business. From 1984 to 1989, the number of licensed nail techs in Los Angeles County jumped from 9,755 to 15,238, about 80 percent of whom were Vietnamese-born. Over the next decade, their salons spread from California across the country. The new entries, says Nails Editor Cyndy Drummey, "made the prices much, much cheaper and made what used to be luxuries more-affordable luxuries.... It's like the electronics industry." The discount salons developed techniques for getting the job done much more quickly, though less luxuriously and with minimal chit-chat. They treated manicures more as a product - nice nails - than as a pampering service. That tradeoff was fine for the new clientele of busy, price-conscious women. The market boomed.

In the story of nail salon competition, we can see many economic trends, both contemporary and timeless: Immigrants expand markets, rather than just taking existing jobs. Competition pushes prices down and spurs productivity-increasing innovation. It also encourages a backlash from old-timers; veteran nail techs like to insinuate, with minimal evidence, that the discount salons are unsanitary and dangerous, and they have pushed for increased licensing requirements and more-intrusive government oversight.

Nail salons also shed light on one of the biggest economic questions of the day: Where are the productivity gains going? "The productivity paradox" usually concerns information technology: Companies invest in computers, but productivity increases don't show up in their profits. Are the computers really bad investments? In a given case, maybe, but it's hard to imagine that all U.S. business is so stupid.

Nail salons suggest an answer: Because of competition, the benefits of increased productivity are going to consumers, not producers. By wielding an electric-powered file effectively, a discount nail tech can file, fill, and polish acrylic nails in 30 minutes, charging $13. A traditionalist filing by hand will take twice as long and charge at least twice as much. The revenue per employee per hour is about the same and may even be higher for the less-capital-intensive salon. All the gains from investing in and learning to use the power file go to the customer, who saves both time and money. That savings creates the mass market on which discount salons rely. But competition among the discounters also drives prices to the lowest sustainable level; any salon that tries to raise its fees to capture some of the productivity returns will find a shop across the street stealing all its customers. (Traditional salons can avoid this price spiral only if they distinguish theirs as a premium service, emphasizing luxury and relaxation.)

The same thing happens when companies in other competitive industries install computer systems to improve customer service. If competition means they can't charge more for the improved service, there is no gain in "productivity" as normally measured. The customer captures, in better service, the return on investment; the investing company simply keeps up with its competitors and gets to stay in business. (These untabulated increases in quality also distort measurements of inflation and, as a result, of real income. See "Priced to Move," February 1997.)

Nail salons create hundreds of thousands of fairly pleasant jobs at decent wages - including tips, the average nail tech makes around $475 for a 35-hour week without requiring lots of education or "knowledge worker" skills. Their suppliers are innovation-driven, competing fiercely to develop better, cheaper products. They even use high-tech materials. Yet when economists, politicians, or commentators get together to spout off on the economy or the future of work, no one ever talks about nail salons - or anything else like them. This is not a random distortion. It, too, has a lot to teach about both economic trends and economic discourse.

Nail salons are girl stuff. Most of the people who work in them are women, as are almost all their customers. Though women make up 45 percent of the labor force, our political discussions do not consider feminine occupations - however pleasant, well paid, or open to minimally educated people - viable alternatives to factory work. These assumptions aren't conscious or malicious; they are simply the result of distorted mental pictures.

But even female policy wonks who get their nails done every week would never think of talking about nail salons - or the multibillion-dollar beauty industry - in public. Such businesses are too embarrassing to mention. This error is far more pernicious: If we ignore all the businesses that provide beauty, entertainment, or other "nonessential," nonmaterial goods, we will miss the future of the economy. Serious discussions of economic trends are no place for fun-hating, beauty-scorning Puritans. When Jeremy Rifkin concludes The End of Work by calling for punitive taxes on the booming entertainment business, he looks ridiculous. Having discovered a frivolous industry that is actually creating a lot of jobs, he demands that we crush it. He isn't interested in jobs; he's just intolerant of change. And he confuses his personal tastes with economic reality.

Human beings of all incomes and levels of technology crave beauty and diversion. But as people get richer, they can afford to spend more on such luxuries. By historical standards, Americans are very rich. It's not surprising, then, to find smart entrepreneurs creating economic value, and lots of new jobs, by catering to our happiness as well as our physical needs. To find them, however, you have to look. Try the Yellow Pages, under "manicures."