Labels are what the search engine finds, and publishes when someone uses the same words. It will make your post come into the search results, like words on ebay, or tags in Etsy. And also, they will make your readers find an easy list of same related information within your blog by clicking on the "label widget" that you can add on the side bar in your blog.
Where are they typed? Here's a little screen shot to locate them better visually.
|Older style layout|
I added my clod of labels before blogger added the widget so I had to to it the hard way. The only thing I noticed different as that I could select the color I wanted, and the widget has only one default. (I have not checked if in the blog-colors area there's an option to change them though)
UPDATE 2013 click to see larger image
What labels can you use? Basically, anything, as long as you wish, divided by a comma. So your label can be one word, or several. It doesn't matter as long as you keep using them AND they apply to your posting. In my case I use the subject of a painting like "calla lilli" or the stuff I'm talking about, like "dog", ACEO" "29 faces" ...you get the idea.
I hope this helps, and like always, if you have any questions, just let me know :oD