I use Illustrator. A lot of people use Inkscape, which is a free vector drawing software. Use it for any line drawings and text. If you want pictures in your label, edit them with Photoshop or Gimp. That means color correcting, sizing, levels, effects etc. Then, import that picture into the vector software. You don't need to convert raster images to vector. Its just easier when you use the correct program for the job at hand.
I get labels all day long that people designed in Photoshop. They have a myriad of layers, layer masks and effects. Do you know how annoying it is to try to click on some text in Photoshop only to find you dont have that layer selected?