Letting them move around freely seems a bit much to me, as I doubt they'd be *that* well broken. However, there are other options.
For example, you could have slave-enabled workshops, built with cages or chains in them, as well as slave quarters- similar in nature to prisons. During the day, the slaves work in their assigned rooms- peasants would have to bring them items to work with, and take away the results, but that could be part of the hauling overhaul. Special dwarves would be assigned to care for the slaves, bringing them food and water and transporting them to their pens when it's time for them to sleep (or they could sleep in their offices). Of course, you'd have the same problems you do now with prisons, where dwarves fail to bring them needed water until they die, but hey, slaves.
It would even follow that certain races would be better for certain jobs. Elves, for instance, keep bringing us those nifty wooden trinkets, right? So, put them to work making wooden crafts out of their precious trees. Toiling away, far from the sun, working with the "murdered" remains of their "friends"... hey, since the goods would be elven-made, it should be ok to sell them to elves, right?
And goblins. They're morbid little bastards, amiright? Natural bonecrafters. So make the ones that fall to your cage traps build stuff out of the ones that fall to your soldiers.