Tight job market delivered widespread rewards. They are at risk.

All that could be at risk. In July, the unemployment rate jumped to 4.3% from 4.1% and is up nearly a percentage point from the low of 3.4% early last year. The economy added 114,000 jobs, the slowest since late 2020 except for this past April.

Economists caution it is too soon to say the labor market is rolling over or a recession is in the wings. Hurricane Beryl, which hit the Gulf Coast in early July, might have temporarily dented job growth. More people coming into the labor force, rather than people losing jobs, helped push the unemployment rate higher.

Nonetheless, an accumulation of data suggests that the labor market is notably cooling. New claims for unemployment insurance have risen. Companies that once complained about dire labor shortages are more easily filling jobs, and hiring has slowed sharply. Wage gains have slowed.

Some of this was expected, even desirable. The tight labor markets of 2022-23 reflected a dangerously overheated economy struggling with supply-chain problems and worker shortages that drove the Federal Reserve’s favored measure of inflation to a 40-year high of 7.1% in June 2022. The Fed raised interest rates in a bid to bring the economy and labor market back into balance and inflation back to its 2% target.

The question now is whether the rebalancing has gone too far and those groups that benefited most from the tight labor market will see those gains dissipate, or endure.

More mothers, Black Americans find work

More women, especially with young children, have joined the labor force, in part thanks to the opportunities opened up by remote work. Of Black Americans ages 25 to 54, 77.9% were employed in July, (unadjusted for seasonal swings), versus 75.2% in July 2019.

The danger is that what has been an upward escalator for a broad array of historically less advantaged groups—a fact celebrated by the Biden administration—could go into reverse.

Elijah Agyemang has been looking for a job for 11 months, and the process has been discouraging, he said. Hundreds of job applications haven’t yielded an offer for a permanent, full-time role. The 24-year-old Brooklyn, N.Y., resident, has completed a software-engineering boot camp and has had a few temporary roles and internships in that field. But without a college degree, he can’t seem to make headway with employers, he said.

“In IT or tech, they say I’m not experienced enough or they’re looking for people with degrees," he said.

The economist Arthur Okun first popularized the term “high-pressure economy" in the 1970s for an economy operating above its longer-run sustainable rate, arguing that it could boost workers’ upward mobility. In an October 2016 speech, then-Fed Chairwoman Janet Yellen riffed on the idea, considering what might happen if the central bank allowed the labor market and economy to run hot for a while.

She said a high-pressure economy might bring more people into the labor market, shift workers into more productive jobs, encourage capital spending and research and development, and lead to more new businesses.

The downside? A high-pressure economy, “if maintained too long," increased the risk of a financial crisis or inflation, Yellen, now the Treasury secretary, said.

Janet Yellen’s hypothesis

The Fed soon got a chance to test the hypothesis. In Fed policymakers’ September 2016 projections, Yellen put down a forecast of 4.5% for the unemployment rate in the fourth quarter of 2019. It fell to 3.6% instead. And yet inflation was just 1.4%, enabling the Fed to keep interest rates low, between 1.5% to 1.75%.

At first, the pandemic seemed to put an end to the high-pressure labor market. But as the economy snapped back, fueled by low interest rates and government relief, the job market went into overdrive. The unemployment rate in early 2023 clocked its lowest level in over a half century, and more people entered the labor market.

The labor-force participation rate—the share of people working or looking for work—among 25 to 54 year olds reached its highest in over two decades last month. Low-wage workers, in particular, moved into higher paying jobs. This helped generate pay gains that outpaced inflation and reduced wage inequality. Economists David Autor, Arindrajit Dube and Annie McGrew have found that from the start of the pandemic to mid-2023, about a third of the pay gap between the 10% lowest-earning and 10% highest-earning workers that had built up over the previous 40 years had been unwound.

Booming investment, startups

Meanwhile, business investment in software and research and development, as a share of gross domestic product, jumped above the prepandemic trend, notes Oxford Economics economist Michael Pearce. New business creation also jumped. Applications for “high-propensity" businesses—those likely to hire employees—were running 26% higher in the second quarter than in the fourth quarter of 2019, according to Commerce Department figures.

Productivity—how much a worker produces in an hour—is starting to improve, growing 2.7% in the second quarter from a year earlier, well above the 1.4% annual pace over the past 15 years, the Labor Department reported. If sustained, that would allow the economy to grow faster and wages to rise more without inflation.

“We are seeing the fruits of that high-pressure economy," Pearce said.

The Fed didn’t necessarily want the economy at such high pressure. But with inflation now on its way to the Fed’s 2% target, it doesn’t want the benefits of a high-pressure economy to drain away with the inflationary bathwater, either.

A recession could do that. Downturns have historically been hardest on the young, the less educated and the poor. Protracted periods of joblessness can erode skills, making it harder to re-enter the workforce. Startups can also struggle to hang on, notes University of Maryland economist John Haltiwanger.

The new dynamism the U.S. economy gained in the wake of the pandemic was wholly unexpected. The danger now is that it could go away.

Lauren Weber contributed to this article.

Write to Justin Lahart at Justin.Lahart@wsj.com