I was just looking this up on Wikipedia, and as it is with lots of murder ballads, there were a lot of variations on the lyrics other than the version Tom Waits used. In one of them the miller doesn't enter into it at all, and the jealous sister actually does get punished: Someone makes a harp or fiddle out of the drowned sister's bones and hair, brings it to the family's house as a wedding present for the oldest sister and Willie, and at the wedding the instrument starts playing itself while singing about the murder.
I was just looking this up on Wikipedia, and as it is with lots of murder ballads, there were a lot of variations on the lyrics other than the version Tom Waits used. In one of them the miller doesn't enter into it at all, and the jealous sister actually does get punished: Someone makes a harp or fiddle out of the drowned sister's bones and hair, brings it to the family's house as a wedding present for the oldest sister and Willie, and at the wedding the instrument starts playing itself while singing about the murder.