In order to become financially self-sufficient, Conrail must reduce its labor expenses, which, in 1978, amounted to 63 percent of its total revenues, compared to the rail industry average of 51 percent. These high labor costs can be attributed to the poor physical condition of its equipment, a legacy of weak management, and labor agreements. The General Accounting Office (GAO) reviewed Conrail's attempts to improve labor productivity and discussed these programs with Conrail officials in 1979. Representatives of other railroads were also interviewed to obtain information on collective bargaining in the railroad industry. Conrail's labor costs declined slightly in 1978 while productivity improved because of new collective bargining agreements. Conrail believes that it can reduce labor expenses to 51 percent by 1983 and operate with 20,000 fewer employees. Work rules are an industry-wide problem, and although labor and management concede that changes could improve productivity, they have not been able to agree on how to make these changes. The Government could encourage modifications through legislation, such as a proposal for loans to railroads THAT compensate workers suffering financial losses due to changes in work rules or operating practices. Conrail's use of Federal funds under Title V of the Regional Rail REORGANIZATION Act (to pay separation allowances to workers who gave up their jobs as a result of the agreement with the United Transportation Union) is not the use intended by Congress, according to GAO. Conrail and the Union contested GAO's interpretation, although they agreed that improved labor productivity is crucial to the railroad industry's survival. The appendixes contain comments from Conrail and the Department OF Transportation ON GAO's review. (Author abstract modified)