I’m going to interpret Daniel’s first question narrowly (or else we’ll be here all day), as “Is it more or less ethical to create a house elf, relative to a human?” where by ‘house elf’ I mean a conscious, sentient being of approximately human intelligence with a psychology built around an essential need to serve humans and the enjoyment of doing so. (See Harry Potter and the Chamber of Secrets.)
For today’s purposes I’ll be staying agnostic about whether or not creating humans is a good thing (though I hear someone has written a book about it), and by extension whether or not you should start brewing up some magical servants.
Instead, I’ll take the decision to create something as a given. The only choice is human or elf.
Humans are on average more intrinsically valuable, in that they are more like me in their values, desires, ambitions, and relationships. (Though of course there are individual exceptions. I’d take Dobby over Jack the Ripper any day.)
House elves are on average more economically valuable. They are efficient, hard-working, and consume very little. Unlike humans, however, there don’t seem to be House elf outliers who have disproportionate economic impacts by inventing, creating art, or creating and running organizations.
With these factors in mind, it seems to clear to me that a mixed population of elves and humans is most desirable, so that they can take advantage of each others’ strengths. Whether marginal people should be elves or humans is pretty much down to economic conditions and the current elf/human ratio.
Second question: assuming house elves exist, is it ethical to use their labor? Yes of course. The alternative would make house elves miserable and benefit no one.
The Only Source Of Morality In The Universe delights in answering your real or hypothetical ethical dilemmas. Direct inquiries to firstname.lastname@example.org.