In sociology terms, the word label is used more as a metaphore, than a concrete concept. The general function of labels is widely known and recognised as a method of distinction that helps people recognize one product from another. In social terms, labels represent a distinction method that is considered by many as a form of prejudice. Therefore, a label in sociology, would function the same way it does on a product, except that in this case, it would be directed at a human being.
The most common way of 'labeling' people is derrived from a general way of thinking towards a certain nationality, religious group, marginal minority, etc. So, if a majority of people has a certain point of view at a certain group, that point of view becomes generaly known as a stereotype. That stereotype affects the way other people perceive the groups in question and the result is a 'label' that is metaphoricaly printed on the members of the group in question. Therefore, a member of a group is 'labeled' by the society, and hence the term in sociology - label.
The way people react to people who are labeled is mostly the same as with prejudicious cases.