I do work harder when someone else is watching, but I don't think I work as well. When other people watch me, especially people of importance, I start to stress out. This results in a lot of work being done, but it is often not to the caliber my employers/school/parents have come to expect from me. The increased stress makes me more worried about who is watching and less worried about what I am doing.
I do agree with the research about the Hawthorne Effect. If someone important is watching, people generally tend to work harder for one of two reasons in my opinion. One reason is so that they don't get in trouble for slacking off, etc. The other, is to make themselves look better to whoever is observing them.
I do not see how such observation is unethical, however I believe in the long run it could cause a lot of undue stress. This increased work-place stress could lead to more burn-outs and an increased employee turnover. Used in short time spans, however, this could be a very efficient method at increasing productivity without overly stressing employees.
I do not believe this is a good data gathering method. The results are essentially buffered because this is not necessarily an employee's actual productivity on a given day; instead, it is his/her productivity while being watched.