The US added 528,000 jobs in July

The labor force participation rate — or the percentage of adults working or looking for work — fell to 62.1 percent in July from 62.2 percent a month earlier. Average hourly earnings rose 5.2% in July from a year earlier, a slight acceleration from the previous month.

Jobs were widespread last month. Leisure and hospitality employers added jobs at a steady clip as restaurants and bars continued to recover. Payrolls also rose in health care and professional and business services, which comprise many jobs.

Sectors vulnerable to Federal Reserve rate hikes also performed well in July. Construction companies, builders and finance companies all added to payrolls.

U.S. stock futures fell after a stronger-than-expected jobs report.

Businesses continued to hire despite two straight quarters of economic contraction, dampening consumer spending and raising recession risks. Total employment has also almost returned to pre-pandemic levels. However, demand for workers in some industries is falling as the economy moves away from the hot expansion that followed the lifting of Covid-19-related restrictions on business activity.

But some companies like Walmart Inc.

and Robinhood Markets Inc.

are cutting staff, but overall layoffs are rising slowly, according to weekly jobless claims.

“Companies used to look to layoffs as a first option,” said Greg Daco, chief economist at EY-Parthenon, a consulting firm. “Now we see slower hiring as the number one option, followed by targeted hiring freezes, followed by targeted layoffs, followed by broader layoffs.”

U.S. jobs remained up but fell in June to the lowest level in nine months and fell by 600,000 from May, according to a separate Labor Department report released on Tuesday. Total jobs remained well above the number of unemployed job seekers.

Federal Reserve officials hope they can achieve a “soft landing” for the U.S. economy as they try to reduce the highest inflation in four decades without a significant rise in unemployment. Fed Chairman Jerome Powell recently told reporters that the number of jobs could fall significantly without a large increase in unemployment.

So far, average weekly layoffs have risen slightly, and anecdotal evidence suggests they’re mostly affecting sectors like technology and real estate, which are more sensitive to rate hikes. Some technology companies, including Microsoft Corp.

Meta Platforms Inc.

and Netflix Inc.,

in recent months they have laid off employees or delayed hiring to deal with slowing growth and impacts from other macroeconomic factors.

Demand for workers remains high in sectors that have not fully recovered from Covid-19, such as leisure and hospitality, education and healthcare.

Matt Zebatto, CEO of Life’s WORC, a nonprofit that runs group homes, job training and other programs for people with developmental disabilities in New York and nearby counties, said his agency’s staffing challenges are approaching crisis levels. Of the 730 positions for direct support professionals—workers who staff group homes around the clock—Mr. Zebatto is trying to fill more than 200.

The agency has been hampered by reimbursement rates from government health care programs like Medicaid that have not kept pace with prevailing labor market wages, hurting its ability to hire. In many areas, the rate is currently $15 an hour, and even with an expected inflation adjustment, the rate will remain below $16. Understaffing is a major issue due to the level of care required by many group home residents. And when existing employees need to constantly work overtime shifts, it leads to more burnout and turnover.

“You can’t automate helping someone put on adult diapers or helping someone into a bathtub,” Mr. Zebatto said. “I’m grateful that someone who works in the service industry gets what they can get, but it makes it harder for us,” he said of the higher wages workers can earn working elsewhere.

Despite the cooling labor market, some economists expect more people to look for work as inflation weighs on household budgets.

Rising prices are the main reason older workers are pulling out of retirement, according to a survey by jobs website ZipRecruiter.

In the company’s June survey, among the 21.5 percent of current job seekers who say they had previously retired at some point, 35.8 percent ranked inflation as the top reason they returned to the job market. Another 26.2% said they are reentering the workforce because they are running out of retirement savings.

Workers who hold out for better jobs tend to lose leverage as the job market cools and are more likely to take jobs they care less about. Tess Devillier of Austin, Texas, took a job last month in the packing and shipping department of a warehouse after working in a variety of retail, administrative and training jobs over the past few years.

The cost of living in Austin, a city that has experienced rapid growth in recent years, has risen. He needed to find a new job so he could list a source of income on an apartment application. She also had conversations with a recruiter for adjunct professors and applied for a customer service position at a phone company, but decided to take the warehouse job because she could start almost immediately and solve her housing situation.

“He doesn’t pay [as] as much as I think I should, but I also don’t want to be homeless,” she said of her new position.

More slack in the labor market will likely lead to less leverage for workers over hours, pay and benefits, economists say.

“We’re already seeing job-seeker confidence dip somewhat,” said Julia Pollack, chief economist at ZipRecruiter. “Only small movements for now, but the changes are all in the same direction: a decline in bargaining power and leverage.”

Write to Gabriel T. Rubin at gabriel.rubin@wsj.com