With American job growth accelerating at a rapid pace throughout May, the unemployment rate officially dropped to an 18-year low of 3.8%. The drop in unemployment could be the result of a tightening labor market, in which 223,000 new jobs were added to the economy in May alone.

This includes improvements for disadvantaged groups: the African American unemployment rate is at its lowest level since 1972, the first year the government began tracking the statistic; and unemployment levels are approaching record lows amongst Latinos and those with only a high school education.

The much-anticipated employment report released by the Labor Department last Friday also indicated that wages are rising at an even pace, confirming expectations that the Federal Reserve will raise interest rates this month and boosting the probability of two more hikes later in the year. On the flip side, however, this information has rekindled fears about an overheating economy and rising inflation.

"The strength of the labor market supports our forecast for the Fed to raise rates three more times this year," said Ryan Sweet, a senior economist at Moody's Analytics. "The Fed is going to get antsy that the labor market will blow too far past full employment."

According to the report, retailers were at the forefront of the hiring process, adding 31,000 new jobs. Health-care companies boosted payrolls by 29,000, construction firms took on 25,000 workers, and manufacturers increased employment by 18,000.

Hourly pay rose by 8 cents, or 0.3% to $28.92 an hour in May. As a result, the 12-month increase in wages rose to 2.7% after holding at 2.6% for three months in a row.

The strong employment report added to a string of equally positive economic data, including consumer spending, industrial production, and construction spending, all of which evinced that economic growth was picking up early in the second quarter after expanding at a moderate 2.2% annualized rate in the January-March period.

The Atlanta Fed is forecasting gross domestic product rising at a 4.8% pace in the second quarter. The strength comes even as the stimulus from a $1.5 trillion income tax cut package and increased government spending is yet to be felt.

"The May employment report was strong across the board, with a solid rise in hiring, another drop in the unemployment rate and a 0.3% rise in average hourly earnings. If anyone has any doubts about a June hike, they should set them aside now," said Chris Low of FTN Financial.

Not all of this is good, though. The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, fell to 62.7% last month from 62.8% in April. It has declined for three straight months.

A broader 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, fell to 7.6% last month, the lowest since May 2001, from 7.8% in April.

A report from the Fed this week showed shortages of truck drivers, sales personnel, carpenters, electricians, painters, and information technology professionals.

"As labor becomes increasingly scarce, we expect to see further strengthening in average hourly earnings," said John Silvia, chief economist at Well Fargo Securities in Charlotte, North Carolina.