The label approach also means the book appears in the regular list on the home screen, as well inside the collection list, once it's opened. As shown in the Amazon help page (the closest thing to release notes I have found), collections are now one way you can sort your list, as well as by author, by title, and by most recently read.
Unfortunately, Amazon seems to have taken away a previously available function. Previously on my Kindle, I could go to the top of the home screen and press the 5-way controller to the left to select not the order to display in but which items to display. I could choose only books, or only personal documents, or only periodicals as well as the default of all items. The new function would be much more useful if the old function were still there, with collections as a new type of "document" that could be listed by itself. Now, either my Kindle is broken or pressing the 5-way to the left does absolutely nothing.
I guess half a feature is better than none, but it sure seems like Amazon messed up.