Google’s data-crunching ways found that the majority of Gmail users aren’t actually using the webmail service’s labels. Starting today, those label names get higher placement, and drag-and-drop labelling aims to make Gmail’s labels more like familiar email folders.
By placing users’ own labels higher up on the left-hand sidebar, right below the main Inbox/Starred/Sent/Drafts destinations, Gmail admits that keeping them in their own box, stuck underneath the chat widget, implied they weren’t that important before. Fixes like those contained in Gina’s Better Gmail 2 Firefox extension and the “Go to label” keyboard shorcut in Gmail’s Labs section helped, but now labels are easier to reach, and kept more at the front of your email-clearing mind.

Google will officially announce these changes later today, and the functionality will be “rolling out gradually” to Gmail users.
If they really wanted them to feel like folders, they could make nested labels, like the, um ‘folders4gmail’ userscripts. Which, incidentally, this update breaks.