Discernment vs. judgement in the labeling meditation
I guess the big difference between mentally noting vs judging what you are experiencing is the degree of objectivity. Noting helps you to perceive your experiences with clarity, which should in turn allow you to gain wisdom through insight into the nature of all experiences/phenomena. For example, if you are experiencing sadness and you note, "sad" you remain impartial. In this way, you clearly observe and experience the feeling of sadness. Your field of experiential perception remains unhindered by inner conflict (reacting to the sadness, rather than just noting it) and you are able to understand the ultimate reality of your sadness. This, applied to all experiences, should also allow you to develop equanimity, one of the seven factors of enlightenment. 

Conversely, if you experience sadness and mentally oppose the sadness, you fail to remain objective through your experience and hinder your ability to perceive and learn about/come to understand your experience. This obviously prevents equanimity but, perhaps more importantly, prevents one from clear comprehension of events (such as a sad state of mind) and thus prevents insight into the nature of such events.

So, the "mental-labeling" technique, as described by the Venerable Mahasi Sayadaw, is actually intended (and more likely than not) to help one become LESS judgmental to oneself and others.

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