A common feature to most aggregative studies of the labor market is a marginal productivity expression in which the quantity of labor appears on the left hand side of the equation, and the right hand side includes the real wage and output. A number of researchers have cautioned that if the output variable is treated as exogenous, serious econometric difficulties may result. However, the assumption that output is exogenous has not been tested. In this paper, we estimate an equilibrium model of the labor market, and use it to test the assumption of output exogeneity. We find that the assumption that output is exogenous cannot be rejected by the data.

In recent months, the governors of several states have suffered major political embarrassments because actual revenues fell, substantially short of the predictions in their respective budgets. Such episodes focus attention on the question of whether states do a good " job of forecasting revenues. In modern economics, forecasts are evaluated on the basis of whether or not they are rational " do the forecasts optimal] y incorporate all information that is available at the tune they are made? This paper dr:vel ops a method for testing the rat i.onal t.y of state revenue forecasts, and applies it. to the aria lysi s of data from New Jersey, Massachusetts, arid Maryland. (ne of our main findtri'i; u,; that in all three states, the I orerats of own revenues are yystematically biased dowriward