I think if we define the culture of the society a bit (as it pertains to slaves) then we can settle this argument somewhat. If Crossgate has a slavery culture similar to the southern US, pre-civil war, then slaves should most definitely take huge penalties to happiness and their "productivity" per unit time should be reduced, though they would have no free will to refuse working at all, on punishment of severe beating of themselves, their families, their friends, and/or random other slaves. They would not be permitted to retain any identity not given to them by their masters. They have no legal or property rights. They are treated as animals: bought, sold, and bred as such. I would strongly prefer that this not be the model we use.
In some other cultures, slaves were afforded legal and property rights, along with a social standing commensurate with their owner's. The slaves of a nobleman may well be higher in social standing than the average freemen. In such societies, there may not be a stigma associated with being a slave, especially if slaves are generally well treated by their owners. Some people may willingly sell themselves into slavery (to pay family debts, for example); they give a lifetime of service in exchange for the guarantee of their basic needs being met (food, clothing, shelter). In pre-modern civilizations, the average freeman was far from guaranteed to meet his basic needs, nevermind those of his family, so becoming a slave in exchange for a guarantee was a pretty good deal for many. Many such societies gave slaves property rights as well, and high status slaves often owned slaves themselves (rather common, I'm given to understand, in the Roman empire). Under such a system, slavery becomes a social contract, which happens to be easier for one party to break than the other. I vastly prefer such a system (it also fits the fantasy-esque setting much better, IMNSHO).
The second option doesn't preclude forcing or coercing people into slavery against their will, but it also doesn't reduce slaves to the status of animals. One can be quite happy as a slave and terrified of the responsibility of being free in such a system.
The second system also has the convenience of eliminating most of the issues brought up so far. There would be no need to change how happiness and the PC[emotion] stats are calculated, the rebelliousness functions, how traits are applied, etc. The only fix needed is to equalize the amount charged per customer for slaves and free girls with the same stats. It also would let us write scripts where the girls willingly become slaves (either by asking the player or vice-versa).
I'm not trying to remake slavery into a positive thing, just less horrific.