It doesn't mean it's as bad as it was before. And not that many people in Morrowind are in debt. And given the resources in Morrowind, it wouldn't be hard to find work in a mine (nice thing about an Egg Mine is that Kwama Workers do all the digging and Kwama Warriors do all the guarding, and while Ebony and Glass mining are probably more dangerous and hard, they are said to pay well).
In the Swedish "http://en.wikipedia.org/wiki/Statare" (It's a stub, I know, but it has a link to http://en.wikipedia.org/wiki/Truck_system which seems to be roughly the same thing, I only took a quick look) the workers were still "free", at least on paper. But in reality, they were nothing else than slaves. They could only change their work place during one week, once a year, they were hardly payed anything (and definitly not in money), and mostly, they were given no other acomodation than, basically, a roof over their head and four thin walls around them. Some were "kept" together in one large building. There is hardly any difference between this and slavery, and this went on in Sweden 'till the mid 20th century.
I find it very probable that some variation of such a system will be implemented in Morrowind. You just can't take away a nations working force like that. The nation would collapse if there were noone to do the hard work.
Besides, how would the slaves get back to their home lands? I doubt their former owners would pay them for the trip. They would become the lowest of classes, struggling to survive. Such people take what jobs, whatever the condition and circumstances are, that are offered to them. Like the "statare" did.
"Seemed to handle"??? Of course they 'seemed to handle a lot slave trading', it was legal, in which case they weren't 'smugglers' but just 'traders'... how does their market grow?
If their deelings were official, there would be no need to hide them in their caves, no need to "smuggle" them in to begin with. There is a black market for everything, including slaves.
And their market grows because there is only the black market left, and people will have to go to them if they want any slaves at all.