By Eric Morath and Ben Leubsdorf

Job creation eased last month but workers are seeing long-awaited wage gains, signs that more than seven years into a slow-growing expansion the labor market is improving enough to reap payoffs for American households.

Nonfarm payrolls rose a seasonally adjusted 156,000 in December from the prior month, a slowdown from November's more robust gain, the Labor Department said Friday. The unemployment rate ticked up to 4.7%, but finished 2016 at the lowest point to end a year in a decade.

Though hiring finished the year on a soft note, cumulative hiring has reduced enough slack in the labor market to force employers to pay more for talent. Wages increased 2.9% in December from a year earlier, the best annual rate since 2009 and a contrast to gains closer to 2% earlier in the expansion.

The report affirms that President-elect Donald Trump inherits an economy on a steady but unspectacular path as he prepares to take the oath of office.

"For the first time in a while, people are seeing some growth in the economy, and consumers are seeing raises beyond the bare minimum," said John McAuliffe, chief executive of Sylvan Learning, a Maryland-based tutoring company which is looking to hire about 500 teachers for its centers. "People feel more confident about their own job prospects."

For all of 2016, the economy added just under 2.2 million jobs, the smallest gain for a calendar year since 2012.

The combination of emerging wage gains and steady hiring likely keeps the Federal Reserve on a path toward raising short-term interest rates cautiously and gradually in the months ahead. Fed officials have penciled in three quarter-percentage-point increases to their benchmark interest rate this year.

December, the final full month of President Barack Obama's term, was the 75th straight month U.S. employers added jobs. It extended the longest such stretch on record back to 1939. The unemployment rate is well down from a peak of 10% early in Mr. Obama's presidency.

But wage growth has been sluggish for years since the 2007-2009 recession, and it remains subdued compared with the pace seen a decade ago.

Economists attribute that to a range of challenges, including an overhang of millions of part-time workers who want full-time jobs and labor-force dropouts. With an army of potential full-time workers in the economy's shadows, many firms have had little incentive to bid up pay.

As unemployment drops, soaking up the pool of potential workers, some of those headwinds to wage growth might be receding, though longer-run challenges persist. For example, a dramatic slowdown in labor-productivity growth over the past decade could restrain the economy's long-term ability to generate strong overall growth and income gains without stoking high inflation.

"Challenges do remain," Federal Reserve Chairwoman Janet Yellen told an audience in Baltimore last month. "The economy is growing more slowly than in past recoveries, and productivity growth, which is a major influence on wages, has been disappointing. But it also looks like the economic gains of the past few years are finally raising living standards for most people."

For now, households are benefiting from the fact that consumer-price inflation is low, meaning workers are losing less of what they bring home to the rising cost of goods and services.

Inflation-adjusted hourly earnings for nonsupervisory workers have increased from a year earlier for 40 straight months, through November, the longest such streak since the late 1990s.

More workers have been quitting their jobs in recent years as the labor market has improved, helping bolster wage growth. Data from the Federal Reserve Bank of Atlanta show stronger gains for people taking new jobs than for workers who are staying with their current employers; the three-month average in November for median wage growth was 4.4% for job switchers versus 3.6% for job stayers, the regional reserve bank said.

"We see wage growth in every job class that we have, from store managers to mechanics," said Don Barnes, president of Belle Tire, a Michigan-based chain of auto service centers. "We want to make sure we pay premium wages to attract and retain the best talent."

The company opened its first stores in Indiana last year, mostly in the South Bend area, adding about 100 jobs. The unemployment rate in South Bend is about half what it was eight years ago and below the national rate. That tighter labor market is putting pressure on wages there.

In the high-paying information-technology sector, "highly skilled candidates are receiving multiple offers, they're receiving offers at increasing compensation package levels," said John Reed, senior executive director at staffing and recruiting firm Robert Half Technology.

A shortage of qualified workers, he said, means "many companies are having to increase compensation levels to retain the people they have or attract the people they want."

Hourly earnings rose 4.4% over the past year in the low-paying leisure and hospitality sector, including restaurant workers and bartenders.

That continued a multiyear trend of rising wages for low-paid workers; the leisure and hospitality industry's average hourly wage was $15.13 last month versus $26 for all private-sector workers.

"We are continuing to see some wage inflation," fast-food chain Sonic Corp. Chief Financial OfficerClaudia San Pedro told analysts this week. "We think that's been occurring over the past 12 months as the labor market's been tightening up."

Not all workers are sharing in the stronger pay gains, including many in the middle of the income scale. Average hourly earnings for production and nonsupervisory employees, the majority of workers who hold rank-and-file jobs, rose a more modest 2.5% in December from a year earlier and showed little sign of acceleration over the past year.

Wage growth has been more modest in some middle-income fields such as education and health care, where workers make close to the national average and saw hourly earnings rise 1.8% in December from a year earlier.

The Federal Reserve Bank of Dallas reported that the index of wages for energy firms in the region turned positive during the fourth quarter. Companies are purportedly stealing crews by paying higher wages as drilling activity ramps back up inU.S. shale plays, especially in Texas, according to a recent report by Simmons & Co. International, the Houston energy investment bank.

A number of privately held oil-field-service companies that help producers drill and frack new wells report that they have had to boost salaries by 10% to 12% in recent weeks to form new crews.

As grocery stores look to go upscale, they are forced to pay higher wages. Sprouts Farmers Markets Inc. said it has increased its wages in recent months to be more competitive in expensive areas like California and "in areas of the stores which are more difficult to operate," like seafood and prepared meals, said Chief Executive Amin Maredia.

While wage inflation "is not good for any retailer," it is productive in the long run to improve retention, training and upward mobility, he said.

--Lynn Cook and Annie Gasparro contributed to this article.

Write to Eric Morath at eric.morath@wsj.com andBen Leubsdorf at ben.leubsdorf@wsj.com

(END) Dow Jones Newswires

January 06, 2017 18:21 ET (23:21 GMT)

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