A LITTLE LESS than two years ago, the U.S. government served notice that if the International Labor Organization didn't shape up within two years, the U.S. government would stop out. The ILO, which is now an agency of the United Nations, actually started life as an offshoot of the League of Nations with a modest mission having to do with international labor standards and featuring tripartite representation from member governments, their unions and their employers. But by 1975, it had long since degenerated into a squalid, highly politicized arena for Third World propaganda assaults on the industrialized democracies, in general, and on Israel in particular. Since the United States' annual dues of about $25 million account for about onr-fourth of the ILO's budget, and its presence as one of the world's two super-powers gives it credibility as a genuinely representative global institution, it was hoped that this threat to pull out under a firm deadline would rally the demoratic members to join the American push for reform, while perharps chastening the new nations that make the modern ILO majority.

If you are prepared to be large-minded about it, you can actually find evidence that this has happened to some extent. Certainly, the U.S. threat has, as one official put it, "concentrated the minds" of America's allies as well as some of its adversaries in the organization. Japan, Australia, New Zealand, the Western Europeans and the Scandanavians have all joined in a diplomatic campaign to turn the ILO back to its original purposes. The organization's director general has indicated a willingness to invoke existing powers that would seem to permit the screening out of agenda items that are plainly not germane. Meanwhile, it cannot be denied that the ILO has done - and, indeed, continues to do - some things that advance American foreign-policy interests in human rights, higher wage (and living) standards and developmental assistance in the Third World.

The question remains whether the ILO's original capacity for good works is not outweighed by its recent penchant for political mischief. The Labor Department and the hierarchy of the AFL-CIO apparently think so, and both are urging President Carter to follow through on the Ford administration's original threat of an American withdrawal. The State Department, on the other hand, is arguing for a one-year extension of the deadline, on the grounds that enough progress has been made toward reform of the organization to justify allowing a little more time for the ILO to demonstrate its willingness to mend its ways.

The deadline for a presidential decision is Nov. 5, and it seems to us to be a very close call. Two issues have developed, the first being what a great power does when an international organization of which it is a member beings to be more trouble than it is worth. Do you work from within for improvement, or walk out in the knowledge that your absence will probably make things worse? Oddly, some of the people who believe most fiercely in "working within the system" in the United States would lead the walkout from the ILO. The second issue has to do with saving face; the United States will lose prestige, it is argued, if it doesn't make good on its threat, the troublemakers will only become more irresponsibly political in the conduct of ILO business and our adversaries worldwide will be encouraged to "call America's bluff."

We think both issues turn, in the end, on whether there really is hard evidence that the two-year warning period has had some good effect, and that another year of probation, so to say, for the ILO would bring substantial and enduring change. It seems to us that if the President is prepared to make that case convincingly, and to keep up the pressure with solid support from this country's allies, it would make sense to extend the deadline for one more year in an effort to salvage the ILO's good works.