By Lucia Mutikani

WASHINGTON (Reuters) - U.S. job growth surged more than expected in June and employers increased hours for workers, signs of labor market strength that could keep the Federal Reserve on course for a third interest rate hike this year despite sluggish wage gains.

Non-farm payrolls jumped by 222,000 jobs last month, the Labor Department said on Friday, beating economists' expectations for a gain of 179,000. Data for April and May was revised to show 47,000 more jobs created than previously reported.

While the unemployment rate rose to 4.4 percent from a 16-year low of 4.3 percent in May, that was because more people were looking for work, a sign of confidence in the labor market.


The jobless rate has fallen four-tenths of a percentage point this year and is near the most recent Fed median forecast for 2017. The average workweek increased to 34.5 hours from 34.4 hours in May.

But stubbornly sluggish wage growth put a wrinkle in the otherwise upbeat report. Average hourly earnings increased four cents, or 0.2 percent, in June after gaining 0.1 percent in May. That lifted the year-on-year wage increase to 2.5 percent from 2.4 percent in May.

"Despite the lack of a pickup in wage growth and core inflation, the Fed will nevertheless push ahead with hiking interest rates," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. "The unemployment rate is already unusually low."

There is optimism that the tightening labor market will soon spur faster wage growth amid growing anecdotal evidence of companies struggling to find qualified workers.

U.S. stock index futures rose on the data, while the dollar trimmed gains versus the yen. Prices for U.S. Treasuries were trading lower, with the yield on the 30-year bond hitting a near seven-week high.

Labor market buoyancy could also encourage the U.S. central bank to announce plans to start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities in September.

The Fed raised its benchmark overnight interest rate in June for the second time this year. But with inflation retreating further below the central bank's 2 percent target in May, economists expect another rate hike only in December.

June's employment gains exceeded the 186,000 monthly average for 2016, reinforcing views that the economy regained speed in the second quarter after a lackluster performance at the start of the year.

Republican President Donald Trump, who inherited a strong job market from the Obama administration, has pledged to sharply boost economic growth and further strengthen the labor market by slashing taxes and cutting regulation.

But Republicans have struggled with healthcare legislation and there are also worries that political scandals could derail the Trump administration's economic agenda.


The economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population.

But even as the labor market tightens, some slack remains.

A broad measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, rose to 8.6 percent last month from 8.4 percent in May, which was the lowest since November 2007.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, rose one-tenth of a percentage point to 62.8 percent.

Employment gains were broad in June, with manufacturing payrolls increasing 1,000 after factories shed 2,000 jobs in May. But the automobile sector lost a further 1,300 jobs as slowing sales and bloated inventories forced manufacturers to cut production.

The sector has shed jobs for three straight months.

Ford Motor Co <F.N> has announced plans to slash 1,400 salaried jobs in North America and Asia through voluntary early retirement and other financial incentives. Others, like General Motors <GM.N> are embarking on extended summer assembly plant shutdowns, which will leave workers temporarily unemployed.

Construction added another 16,000 jobs last month. Healthcare employment surged by 59,100, while the professional and business services sector created 35,000 jobs.

Retailers hired 8,100 workers, a surprise for a sector which had shed jobs for four straight months. Department store operators like J.C. Penney Co Inc <JCP.N>, Macy's Inc <M.N> and Abercrombie & Fitch <ANF.N> are struggling with stiff competition from online retailers led by Amazon <AMZN.O>.

Government employment rebounded by 35,000 jobs last month, with gains at federal and local governments.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Meredith Mazzilli)

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