President Carter's civil service reform -- designed to make it easier for government to fire "incompetents" -- undergoes a major, make-or-break test this week.

If the president's plan loses before the new Merit Systems Protection Board, it could be as long as two years before any federal agency could fire any employe for alleged incompetence.

At issue is whether government departments can rate employe job performance (and fire or demote those who don't measure up) without new, complex standards required by the Civil Service Reform Act. If the MSPB says agencies must have the new systems in place, they cannot fire anyone for "incompetence" until the procedures -- two years away from completion by most agencies -- are installed.

Concerned administration officials, anxious to get the streamlined rating and firing system off and running, will argue that longstanding (if little used) agency power to rate and remove "incompetents" has not been erased by the Civil Service Reform Act.

The American Federation of Government Employees union is one of the parties that will argue before the MSPB on Thursday. It contends that no ratings or firings can take place until agencies have complied with the reform act and installed new rating systems. Furthermore, AFGE says, agencies must negotiate with unions to develop the new performance appraisal systems. The government will argue that such appraisals are not negotiable.

AFGE brought the test case on behalf of thousands of Social Security workers who had been or were being rated on performance by their agency. Those who didn't measure up were to have been fired or demoted. All this -- plus other government firings of "incompetents" -- is now blocked until the MSPB issues a no-appeal ruling.

If the independent MSPB upholds the union argument, it would block firings or demotions for "incompetence" in all agencies until they have installed new appraisal systems. And it could also agree that those systems must be worked out in agreement with unions.

On the other hand the MSPB could uphold the government argument that agencies can continue under their old rules in finding and disciplining alleged incompetents. They could continue doing it under existing rules until October 1981, when they must have new rating systems required by the Civil Service Reform Act.