A famous study by Robert Rosenthal showed how labelling kids, or rats, can affect their performance. Here is a description of his work with rats:
"Rosenthal is well known for his research on experimenter expectancy effects, the influence that a researcher can exert on the outcome of a research investigation. In one of his early experiments, he tested the effects of experimenter expectancy on maze-running performance. He had two groups of students test rats, wrongly informing them either that the rats were specially bred to be "maze dull" or "maze bright." In reality, all rats were standard lab rats, and were randomly assigned to the "dull" and "bright" conditions. The results showed that the rats labeled as "bright" learned the mazes more quickly than those labeled as "dull." Apparently, students had unconsciously influenced the performance of their rats, depending on what they had been told. Rosenthal reasoned that a similar effect might occur with teachers' expectations of student performance."
And his work with children:
All students in a single California elementary school were given a disguised IQ test at the beginning of the study. These scores were not disclosed to teachers. Teachers were told that some of their students (about 20% of the school chosen at random) could be expected to be "intellectual bloomers" that year, doing better than expected in comparison to their classmates. The bloomers' names were made known to the teachers. At the end of the study, all students were again tested with the same IQ-test used at the beginning of the study. All six grades in both experimental and control groups showed a mean gain in IQ from before the test to after the test. However, First and Second Graders showed statistically significant gains favoring the experimental group of "intellectual bloomers". This led to the conclusion that teacher expectations, particularly for the youngest children, can influence student achievement."
In schools that put children at tables by ability, not only the teacher is aware of the label, but the child ALWAYS knows, and so do all of his or her peers.
It seems so obvious that this can be terribly damaging.