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William Radcliffe, owner of a weaving business, describes here the transition period between hand-work and mechanization in cloth production in England. The transition took place in two stages: first, mechanization of carding wool & spinning it into thread (1780-1788), and second, the invention and spread of the power loom. Radcliffe describes the first stage. He notes that the loss of a hand-spinning industry increased income disparity as some families were thrown out of work, so that the village suddenly had to contend with supporting the poor. However, cheap factory-made thread eventually brought a massive increase in demand for fabric, and those families that had the resources to respond, purchasing additional looms and expanding their businesses, became far more prosperous. Indeed he calls this phase, from 1788 to 1803, the "golden age" for weaving villages. Demand for cloth was booming, weaving was still a relatively small-scale operation so that villagers could respond to the demand, and weavers' salaries increased accordingly.
Note that Watt's engine went into production at the beginning of this period, but is not yet being used in weaving.
At the turn of the 19th century, non-human power finally reached the weaving industry. Richard Guest, the inventor of the power loom (powered by either steam or water wheels) describes this final stage of the transition of cloth production, as factory weaving displaced home weaving. The first factory for steam looms was built in Manchester in 1806 - the end of the Radcliffe's "golden age". Guest estimates labor productivity increased by a factor of 20: the work previously done by 2000 people is now done by 100 boys and girls. Home weaving was no longer competitive.
The mechanization of manufacturing - whether by water or steam power - and resultant dramatic increases in scale and productivity led to a rough and extremely rapid transition in both society and economy. While manufactured goods became much cheaper, Britain also experienced a rapid increase in income disparity and massive movement of people from farms to cities as home-based industries vanished. The transition included an unprecedented increase in child labor, with children as young as 5 leaving their families to enter the factories. In 1845 Benjamin wrote that England was divided between rich and poor "between whom there is no intercourse [i.e. interaction]...as if they were dwellers in different zones." The Victorian upper-class emphasis on domesticity, the delights of childhood, and women as frail beings requiring protection, may be a reaction to the fact that for most of English society, women and children were now leaving the domestic environment and laboring under brutal conditions.
The exact causes of the awful Victorian labor conditions remain a puzzle in economics. Machanization definitely allowed children to operate machinery performing tasks that were previously done by adults. Many contemporary writers seem to feel more broadly that society got into a vicious spiral: people whose livelihoods had vanished became potential factory laborers, increasing the labor supply; as people queued for factory jobs, wages dropped and conditions worsened; as wages dropped, families in financial hardship sent women and children to work to make ends meet; the influx of women and children in the labor force further amplified the oversupply of labor.
For writing on the labor supply issue, see "London Labour and the London Poor", 1851, by Henry Mayhew. There's much interesting stuff in this report, but I recommended starting on p. 311. the sectioning beginning "I now come to consider the circumstances causing an undue increase of labourers in a country" and read at least to p. 314 "They must all go to the workhouse when they're sick or old." (The workhouse or "poor-house" was a Victorian institution for the support of the poor, providing food and shelter but also requiring hard labor of its inmates.) Another source (though the author is a little crazy on many subjects), is P. Gaskell The Manufacturing Population of England, It's Moral, Social, and Physical Conditions, and the Changes Which Have Arisen From the Use of Steam Machinery", 1833. The chapter on "Infant Labour" starts on p. 173. The beginning is interesting but I especially recommend the section from p. 182 "Yet a change is gradually creeping over the condition of the operatives..." to 187 "... was disposed to displace the adult male labourer, and throw him for support upon his family..."
Whatever the causes, the way out of the situation seems to have come only through regulation. There are abundant primary-source documents online about the first investigations and attempts to regulate. The first Factory Act of 1802 protected "parish apprentices" (children taken from orphanages or work-houses for the poor) in the water-powered mills of the times. As the factories expand, people begin protesting that the changes to society are intolerable. In 1815 Robert Owen argues that children should not be allowed into the factories until age 10, and that public education should be provided so that they can at least read and write. By 1816 the British government is investigating factory conditions. There's a government report on conditions in cotton mills in 1818, which led to the 1819 Cotton Mills and Factories Act: now children under 9 could not be employed, and those between 9-16 could work no more than 12 hours a day and not at night. However, there was no inspection mechanism provided to ensure compliance; factor inspectors weren't authorized till the 1831 Labour in Cotton Mills Act. Regulatory efforts continue through the 1800s, as regulations were applied piecemeal, industry by industry. In 1842 a government report on conditions in the mines says that children frequently begin work at age five (their fathers "carry them down" as soon as they can walk, to help in the mine); the 1843 Mines Act then prohibited boys under 10 from being employed underground (though aboveground was still fine). You can see bits of the 1818 and 1842 reports here (scroll down), and more about child labor in mines in a chapter taken from Engels' "The Condition of the Working Class in England", published in 1844 but reflecting earlier conditions.
The horrors of the first half of the 19th century lessened in the 2nd half as society and economy adjusted to the industrial system, though child labor did not immediately disappear. Industrialization in America unfolded along a similar trajectory, but delayed in time by some 50 years. Working conditions (and child labor rates) in the turn-of-the-20th-century U.S. were similar to those in mid-19th century England. This article from Monthly Labor Review describes the terrible state of child labor in the U.S., which was shocking to outside observers. A follow-up article describes the a reform movement that fought for child labor restrictions, over the objections of mill owners and sometimes even the parents. Investigators from the National Child Labor Committee, the group that hired Lewis Hine to take photographs, reported an “unnatural class of parents who had become accustomed to subsist[ing] by their children’s labor.” Mill owners deployed a host of self-serving arguments to justify child labor, including that they were promoting "good industrial habits" in children and that any objections were raised by "outside agitators". David Clark of North Carolina, the editor of the Southern Textile Bulletin, argued in 1914 that no child’s health had ever been harmed by working in a mill and that the bill was a plot by Northerners to control the South. Attitude towards child labor began to turn only in the 1920s as prosperity grew to the point that parents stopped seeing their children as necessary sources of support. The huge flow of new immigrants may have also reduced demand for cheap child labor, and of course the Great Depression reduced the demand for labor of all kinds. Child labor protections were rolled back during World War II as the war effort required more labor and much of the workforce had entered the military, but protection resumed once the war ended and significant child labor no longer exists in the U.S.