IN THE SNOWY hills of Vermont, womed toiled in their homes knitting warm caps for the skiers who patronize C.B. Sports Co. of Bennington. The women, who are aged, infirm or mothers of small children, were happy for the opportunity to earn some money without having to leave home in a state where transportation is difficult and jobs scarce even for the ablebodied and carefree. The company was pleased with their product, and the taxpayer was relieved of the burden of welfare support for the women and their families. This seemingly idyllic arrangement came to an abrupt halt a few months ago when the Department of Labor brought suit against the company, citing violations of the minimum wage (the women were paid about $1.50 per hat) and of a department regulation restricting employment of homeworkers.

Before we go further, you should know that the regulation that was invoked is not exactly hot off the government press. It was issued in the early 1940s when extensive hearings revealed the employers in seven apparel and related industries (embroidery, buttons and buckles, etc.) were avoiding the then relatively new minimum-wage requirements by farming out factory work to unsupervised homeworkers. Rather than attempt to police the industries on a case-by-case basis, the government simply banned the use of homeworkers except in disability cases determined to cause "unusual hardship" to individual workers.

There is surely nothing wrong with what the government set out to accomplish in the beinning. Having decided to protect workers from exploitation, it is reasonable to keep employers from circumventing these protections and undercutting factory wages by employing workers at substandard wages in their homes. The trouble comes in the failure to adapt regulations to a changing marketplace.

Nowadays, more and more people previously considered "outside the labor force" -- mothers with small children, retirees on small pensions and the handicapped -- want and need employment. Working in their homes may be cheaper and more convenient for everyone concerned. Government regulators argue, however, that monitoring "cottage industry" is too difficult, since people who work at home may lie about their hours to make their wages higher. But do we really care if Mrs. Jones is a little slow at her cap-knitting because she stops to change the baby or stir the soup or briefly goof off? What matters is if the factory owner pays her less than he has to pay a factory worker doing the same work. In economists' words, this means determining the "labor content" of the goods produced, not an effortless task but surely no worse than the numerous others required by government regulations.

It is heartening that the Department of Labor has decided to hold new hearings on this issue next month. It cannot be a bad idea, or a force for destabilization, for the government to review the wisdom of its regulations at least once every 40 years.