“Nested Labels” is a new Lab in Google Apps that allows you to create Label hierarchies (e.g., parent folders and subfolders). Go to Settings > Labs and enable “Nested Labels,” then click Save at the bottom of the window.
You have to pay attention to how you create nested Labels; if you want to create a parent Label called “Classes” with sub-Labels for “2009” and “2010,” you’ll need to first create the parent Label (via Settings > Labels) as normal:
Then create the 2009 Label using a / between the parent Label and your desired sub-Label:
Now, create the final sub-Label:
The resulting Label structure as it appears in my Labels list:
A word of warning: Don’t try this with existing Labels. You need to create new Labels in order to create hierarchies. You could use the Label rename feature to rename an existing Label to something else, then create a new Label with the old Label name.
More info on create nested Labels can be found on Google’s website.