The problem I see with this is that Small Wonders can not produce Improvements in all cities, only Great wonders can.
I suggest it being a small wonder, requireing the Indigenous People resource, that can only be built in cities with the palace, and can produce a slave (Immobile, tradeable worker, upgradeable to worker, uses Captured Worker graphics) every 10 or so turns. If you trade, this will give you a nice large sum of workers not needing an Upkeep (reperesenting treating the slaves badly).
The problem with this is that the AI tends not to upgrade their units, so it'd require play testing.
The downsides you mentioned wouldn't need changing, exept maybe the -2 happy faces. The reason the Slave-Trade went on so long, is because it gained high-support. Maybe make it government specific, too, e.g. Monarchy.
Well, that's my suggestion on the matter.