Its shirring with elastic thread. practice on scraps first, and steam it after to make it get scrunchy:
1. Purchase elastic thread. Wind the elastic thread on the bobbin in the usual fashion (very slowly or its too tight)
2. Thread machine as usual with regular thread up top, and insert elastic threaded bobbin. Use the LONGEST STITCH possible. you may have to lower your top tension a bit.
3. Start to sew a straight line on your scrap, don't back stitch, leave long ends. at the end of the row leave long ends and start again on the other side, use your machine foot for a guide for spacing between rows. repeat until you have what you need.
4. Lay the fabric down and using the highest heat/steam setting possibl for the fabric, hold the iron an inch or two above it and let the steam "re-generate" the elastic. Its so much fun to watch it shrink! (Yeah I am weird, but I am helping so no laughing!)
There, now you know how to do shirring by machine. You probably need to use a longer strip of fabric then you think, but you can always experiment. Also, one bobbin full of elastic thread does not last long. Fill up a couple to start, and experiment first or you will probably be sorry. Trust me on that one!
Here is a pic of a little dress I made last summer:
you probably can't see the shirring too well though. The rows were spaced far apart.