It was made during a production strike.
Shades of Grey, and Season 2 in general, suffered from the writers strike of '88.
This is a myth that just won't die. The Writers' Guild strike happened a year before "Shades of Gray." It had no impact on it whatsoever. The strike affected the end of the
first season, in that the climax of "We'll Always Have Paris" had to be largely improvised without a writer on hand to revise it (which may be why Data said "It's me" after he'd been established as not using contractions), and in that "The Neutral Zone" had to be shot from a first-draft script (which is why it's so sloppily written and full of holes). It also delayed the beginning of the second season and led to it being shortened by four episodes. But it had no impact on the end of season 2.
And just in general, there's no reason why a writer's strike would have any connection to a clip show. Writers' strikes are rare, but clip shows happen all the time. There are many TV series that do clip shows every year and actually budget for them from the start -- particularly cable shows like
Stargate SG-1 and syndicated shows like
Xena: Warrior Princess. Clip shows have been a commonplace money-saving practice in Hollywood since
before television even existed; there were whole movies that were made as compilations of earlier movies, and occasional Looney Tunes, Popeye, and Tom & Jerry cartoons that were compilations of earlier cartoons. They called them "cheaters" back then.
Not to mention that clip shows do need writers. Someone needs to write the new material that justifies the flashback format and frames the clips. So clip shows couldn't be done during a writers' strike any more than any other kind of episode. It's the other aspects of production
besides writing that a clip show cuts back on. What you'd see instead during a writers' strike would be something like a newly filmed remake of an old or unused script, like TNG's "The Child" or several episodes of the '88
Mission: Impossible revival (which was conceived during the strike as a way to get a new production out of old scripts, but was reworked into a continuation rather than a remake once the strike was resolved, allowing the recycled scripts to be rewritten just as "The Child" was).
The real explanation is simply that the producers of TNG needed to spend "above pattern" (i.e. more money than allocated) on a couple of earlier episodes including "Q Who," and in order to get permission to spend more money on those, they
had to agree to do an episode that could be shot in three days in order to cancel out the budget overrun. The simplest, most tried-and-true way to achieve a script that can be shot in three days is to do a clip show, so that's what they did, just as hundreds of other shows have done before them and after them on a routine basis for decades, without strikes being involved in any way. And since Maurice Hurley was in his last days as showrunner and on his way out the door, he did a really slapdash job on the script. It was the last thing written at the end of season 2, so there's no reason it would've been affected in any way by a strike that had ended nearly a year earlier.
The reason this myth of the strike having something to do with "Shades of Gray" persists is because people see two bad things happening in early TNG -- a writers' strike and an infamously awful clip show -- and the natural reflex is to assume they're connected. But they're not. Clip shows are a routine way to save money in TV. If anything, what's unusual is that Trek never did another clip show after "Shades." Most syndicated shows in the '90s did them at least once a year. But "Shades" was so hated that the Trek producers resolved never to do another clip show, and so they found better ways to do money-saving episodes -- bottle shows relying on intimate drama rather than action and effects, like "The Drumhead" or "Duet." Which were some of ST's finest hours. So we can be grateful to "Shades of Gray" for that, at least.
