Ethernet is becoming the dominant aggregation technology for carrier transport networks; however, as it is a LAN technology, native bridged ethernet does not fulfill all the carrier requirements. One of the schemes proposed by the research community to make ethernet fulfill carrier requirements is ethernet VLAN-label switching (ELS). ELS allows the creation of label switched data paths using a 12-bit label encoded in the VLAN TAG control information field. Previous label switching technologies such as MPLS use more bits for encoding the label. Hence, they do not suffer from label sparsity issues as ELS might. This paper studies the sparsity issues resulting from the reduced ELS VLAN-label space and proposes the use of the label merging technique to improve label space usage. Experimental results show that label merging considerably improves label space usage