The long, slow recovery in the U.S. job market is leaving ever-more Americans on the sidelines—and complicating the calculus for Federal Reserve policy makers weighing when the economy can get by with less help.

Employers added 169,000 jobs in August, the Labor Department said Friday, a bit more than in July, and the unemployment rate fell to 7.3%, the best mark of the recovery.

But beneath such positive numbers lay evidence of a job market stuck in second gear. The government revised down its estimate for June and July hiring by a combined 74,000 jobs, and a disproportionate share of the jobs that are being added are in low-paying sectors such as restaurants and retail. At the recent pace of hiring, the economy won't get back to prerecession levels of employment, adjusting for population growth, for more than eight years.

The unemployment rate, meanwhile, fell not because people found jobs but because they gave up looking. The number of people reporting they had jobs—a measure based on a separate survey from the one used to calculate payroll gains—fell by 115,000 in August. As a share of the population, fewer Americans are working or looking for work than at any time in the past 35 years.

A Historical View U.S. unemployment since 1948

"There is little evidence that the overall economy is accelerating," said Patrick O'Keefe, director of economic research at CohnReznick LLP, an accounting and advisory firm. "Even with these incremental improvements, the recovery remains subpar."

Phil Izzo and Sudeep Reddy join the News Hub with coverage and analysis of the August employment report. Photo: AP.

August jobs numbers suggested the recovery isn't gaining strength. Will that complicate the Fed's plans for tapering? Kathleen Madigan joins MoneyBeat.

The conflicting signals sent by Friday's report will likely weigh on Fed policy makers as they decide when to begin winding down their $85 billion-a-month bond-buying program meant to spur growth. Many private-sector economists had been expecting the pullback to begin at the Fed's September policy meeting, and such a move remains possible: Job growth has remained steady, and the unemployment rate continues to fall. But Fed Chairman Ben Bernanke and other board members have stressed that they are watching a range of job-market indicators, many of which suggest less improvement.

"I don't think it truly tilts the balance away" from the Fed starting to dial back bond buying in September, said Eric Lascelles, chief economist at RBC Global Asset Management Inc. "But it's no longer the slam dunk that it would have been."

August's lackluster report stands in contrast with other recent signals that the economy is gaining momentum. Both the manufacturing and service sectors are expanding, exports have held up despite weak growth overseas and the housing market is mending, although rising mortgage rates may curb activity. Car sales recently surpassed their prerecession levels, and broader measures of spending and confidence suggest consumers were relatively unfazed by early-2013 obstacles such as higher taxes and gas prices and the federal budget cuts known as the sequester.

Friday's Labor Department snapshot, too, contained some encouraging details. Average hourly earnings and hours worked both climbed, after falling in July. Local governments, which slashed jobs during the recession and early in the recovery, added workers for the fifth time in six months. Full-time employment increased, and the number of workers stuck involuntarily in part-time jobs fell sharply.

But such positive signals were overshadowed by the continued exodus from the American labor force. The share of the population that is working or looking for work—a measure known as the participation rate—fell to its lowest level since 1978, when women were still under-represented in the workforce and manufacturing accounted for more than a quarter of private-sector jobs.

The decline in labor-force participation reflects to some degree long-term trends, such as an aging population and increased rates of college attendance. The rate has been trending down since 2000, and government economists expected it to keep falling even before the recession hit.

But much of the recent decline has been driven by the weak economy. Nearly a million Americans say they have given up looking for work because they don't believe they can find a job, and millions more say they would like to work but aren't actively searching. August was the 40th consecutive month in which more unemployed workers left the labor market than found jobs.

When—and if—those workers will return to the labor force is one of the most significant questions for both short-term economic policy and long-term economic growth. Economists increasingly fear that many of the labor-force dropouts may be gone for good: Hundreds of thousands more workers are receiving federal disability benefits than before the recession, and research that shows many employers won't even consider hiring the long-term jobless. But much of the decline in the labor force has been among younger workers, many of whom are likely to return to work if hiring picks up.

So far, however, there is little sign of that happening. More than 4 million Americans have been out of work for more than six months, and their odds of finding a job have barely improved in the past two years, even as prospects have improved for the more recently unemployed.

Philip Hasskarl has spent much of the past three years looking for work. The 61-year-old Haverhill, Mass., resident finally found a job last year, only to lose it in February when his employer cut the company sales force to 14 people from 50. He said he recently had three interviews and remains optimistic, but has little doubt that his age is making it harder to find work.

Mr. Hasskarl, who trained people to sell medical devices, said giving up isn't an option. He and his wife "burned through whatever I had set aside for retirement just to keep the house," he said.

Most experts attribute the subdued pace of hiring to lackluster economic growth, which has given companies little reason to add workers.

"There hasn't been enough duration of strong economic growth for companies to choose to shift hiring into a higher gear on permanent employees," said Carl Camden, chief executive of temporary-staffing firm Kelly Services Inc. "I'm already hearing…customers wondering when the next recession is going to hit."

For other companies, the recession never ended. Jay Lunt, owner and president of Folkers Window Co. in Pensacola, Fla., said real estate "hasn't recovered at all" on Florida's Gulf Coast. As a result, Mr. Lunt, whose company installs doors and storm shutters, has no plans to add to his work force of 23 full-time employees.

"The bottom line is when the customers aren't out there to buy your product, there's no reason for expansion," he said. "When people start spending money…we gear up to address that."

Write to Brenda Cronin at brenda.cronin@wsj.com and Ben Casselman at ben.casselman@wsj.com