Labels are used to classify your work on blogger which makes your blog easier to navigate. Labels work as tools to categorize different types of posts on blogger so a user reaches to his desired posts by clicking a single category. Using blog archive for navigating a post is too complicated process in blogger so Labels provide an easier access to posts in a specific category.
When creating a post on blogger, you always see Labels option under post settings menu on the right hand side of the screen. The keywords which categorize the posts are written here called labels. You have to write those Labels for your post by clicking on which you want your readers to reach a specific category of posts. For example, I am writing this post for blogging purpose so I will write a main label "blogging" for it on my blog. Whenever you will click the blogging label on my blog, you will be redirected to the posts list containing this post and other blogging related posts where I have written the label "Blogging".
Now the question arises how we can use these labels efficiently on our blog to make site easier to navigate and make classification possible and easier. On blogger, you can use pre-existing "Labels" widget to to show all labels categorize them. A new Labels widget can be used under the heading Categories, Tags or Labels.
Lets understand them.
Title: It is the title of the categories which will be shown on your blog like categories, tags, labels etc.
Show: If you select "All Labels", all labels of your blog will be shown. If you have thousands of tags on your blog, then this might troubles your blog. Try using Selected Labels in this case. When you click on selected labels, you will be able to select only those labels which you want to show on your blog.
Sorting: This allows you to sort your labels by alphabetical order or by frequency or quantity of a label in the blog.
Display: In list mode, a vertically up down list is shown and in cloud mode, the labels are displayed in a desperate manner like in this image.
Show Number Of Posts Per Label: By checking this option, you will see number of posts per label.