As families in the United States grapple with rising prices and ongoing supply shortages, fiscal and monetary policymakers are shifting their focus from the COVID-19 recession and recovery to the ongoing issue of inflation. Headline inflation was 8.5 percent in July 2022—cooling slightly from earlier in the year—while core inflation, which excludes volatile energy and food prices, neared 6 percent.

While policymakers and economists are in the middle of a heated debate on the efficacy, relative dangers, and potential benefits of interest rate increases to address inflation, less attention is being paid to the sector-specific impacts of interest rate hikes and a subsequently cooling labor market. One particularly overlooked sector is child care, which has yet to fully recover from the COVID-19 recession and remains particularly exposed to the ebbs and flows of the macroeconomy.

As the Federal Reserve Board’s Federal Open Market Committee considers further rate increases in the coming months, it should weigh the potential impact on the child care sector, which underpins much of the rest of the U.S. economy and, as such, the country’s ability to achieve broad-based economic growth. Meanwhile, policymakers who control fiscal policy should make targeted, public investments in the stability of child care to minimize the damage that potential rate hikes could inflict on an already-fragile market.

This column looks at the state of the child care industry in the United States, the impact of a recession on the weakened care economy, and the details of policy actions that policymakers can take to protect the industry from collapse—thus protecting the broader U.S. economy as well.

The strong overall U.S. labor market masks fragilities in the child care sector

In July 2022, the economy added 528,000 new jobs while the unemployment rate ticked down to 3.5 percent. While some at the Federal Reserve suggest the U.S. labor market is “strong enough” to handle higher interest rates, these topline numbers mask lingering weaknesses in certain sectors.

Despite a slight uptick in hiring this summer, child care is still missing more than 8 percent of pre-pandemic jobs, even as the rest of the private sector has completed its recovery.

Read the full article about the U.S. child care market by Sam Abbott at Equitable Growth.