Labels can be used to filter content available to managed accounts, but they cannot be used for filtering the view of the library under managed accounts like can be done with the admin user. Managed users should be able to filter their view based on labels assigned to the content that they have access to.
This has been broken for years. I’m fairly convinced managed accounts is an unsupported feature at this point because when any new features are added they don’t seem to test managed users, and inevitably things are broken for managed users but work fine for everyone else.
This is not broken.
Labels are also known as “sharing labels”. As such, it should be clear that they contain functionality that only the server admin should be allowed to use.
Managed users are shared users. Shared users are not allowed to perform any kind of administrative task, nor are they allowed to change anything about what is shared and what is not.
Sounds like labels are currently working as they were originally intended, but that functionality should be expanded to include the ability for managed users to filter the view on the screen. That functionality already exists for admin users, so shouldn’t be a big leap to include that functionality for managed users, but the list of labels available for filtering the view would be restricted to the labels the user has been granted access to view.