Yes, I believe I work harder when someone is watching. However I think it also depends who is doing the watching and how they are doing it. If they are watching and you are struggling with some problem, they can help you solve the problem.
I think that the Hawthorne Effect had some good points. It said in the text that the study discovered that productivity had improved during observation, whether the conditions were made better or worse. I think that the conditions and the environment also determine how hard people work.
Such observation is ethical to a degree. If you are misusing company equipment in some way, the employers can find out by monitoring you. However if you are doing nothing wrong, then your privacy is being taken away and you feel as though your superiors do not trust you.
If productivity increases during observation, then observation is a good data gathering technique in a system study. By observing employees performing their jobs, employers can know how you work, your work ethic, and how you use company time. Too much observation or too little can hinder the productivity of companies. A moderate amount of observation would work just fine.