Use text boxes, as HoW suggested, and/or use a table in Word. The table cells need to formatted to fit your label stock. If you use Avery labels, you can get templates from Avery for the different types of labels they sell. I think other sellers (Online Labels, etc.) offer templates too. Copy and paste the correct bits into the table, exactly like the example SnappyLlama shared.
Problem is that if you want anything more than the very simplest type of label, Word can be a royal pain in the b**t to use for this work. For anything kind of complicated, it's better to use a graphic design program or a paint-draw type of program (photoshop, gimp, paintshop pro, etc.) for laying out the artwork and text of a single label. Then save the finished label as a jpeg file and paste multiple copies of the jpeg file into Word so you can print them as shown in Snappy's screen shot.
Mail merge is nice for dealing with a lot of information that varies a lot, like when you print out address labels for a mass mailing. But it isn't necessarily much help with graphic design.
I wrote a tutorial about making labels and I know Stacy wrote a more detailed step-by-step procedure here on SMF. I linked to her tut in mine. Maybe you can get some other ideas from these write-ups. See http://classicbells.com/soap/soapyStuff.html