RALEIGH – In my continuing mission to rescue economic reality from the tender mercies of the Bad News Heirs, I commend to your attention today this paper by James Sherk, the Bradley Fellow in Labor Policy at the Heritage Foundation.

(I promise, this is by no means simply an excuse to make a lame joke about labor and shirking. I admire Sherk’s work. Morever, I promise that I am not just shamelessly plugging a Bradley Fellow at the Heritage Foundation because, well, I was once a Bradley Fellow at the Heritage Foundation.)

Okay, on to the point. In his piece, “Analyzing Economic Mobility: Compensation Is Keeping Pace with Rising Productivity,” Sherk takes on the frequently repeated fallacy that something has gone horribly wrong in the American economy because gains in worker productivity are no longer translating into commensurate increases in worker compensation. Far from it, Sherk found. Analysts of the “Two Americas” school prefer to fiddle around with wage data, which do show relatively weak growth since the early 1970s.

Why do they have this preference? Because it seems to show relatively weak growth, silly.

The measure that really matters is not the cash wage, though, but the dollar value of the total compensation that workers receive – including health plans, employer contributions to retirement programs, vacation time, and other non-wage benefits. These benefits have become an increasing share of the average worker’s compensation package since the 1960s, so leaving them out results in a substantial undercounting of the growth of worker compensation since then and its value today.

There are other problems with the data, too. They employ measures that overstate price inflation and understate the real value of goods and services purchased by households over time. There is also a mismatch in the data sets between average data and median data. And changes in family structure can have dramatic effects on income data that are reported per family or per household, given that if a husband and wife each making $25,000 a year divorce, that means a single household with a $50,000 income becomes two households with an average income of $25,000.

Put all this together, and you get a major change in the trend lines for productivity and worker compensation. Looking only at cash wages adjusted in the normal way, it looks like workers aren’t taking home the share of productivity gains they used to. But after Sherk’s adjustments, the trend lines since 1987 of productivity gains and real worker compensation per hour are virtually identical. Productivity grew 53 percent from 1987 to 2007. Real compensation per hour grew by 46 percent. When you further consider that a larger share of workers directly or indirectly own corporate stocks and bonds today than in 1987, even the small remaining gap loses its hand-wringing potency.

Just relax, folks. The American Dream is very much alive and kicking.

Hood is president of the John Locke Foundation.