Below is the sample of label in drop down menu
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Click layouts
Click Edit HTML.
Click download full template to back up your template.[ very important ]
Click expand widget templates.
Find the Code below:-
<ul>
<b:loop values='data:labels' var='label'>
<li>
<b:if cond='data:blog.url == data:label.url'>
<data:label.name/>
<b:else/>
<a expr:href='data:label.url'><data:label.name/></a>
</b:if>
(<data:label.count/>)
</li>
</b:loop>
</ul>
Now delete the code and replace them with below codes:-
<select onchange='location=this.options[this.selectedIndex].value;' style='width:100%'>
<option>Browse By categories</option>
<b:loop values='data:labels' var='label'>
<option expr:value='data:label.url'><data:label.name/>
(<data:label.count/>)
</option>
</b:loop>
</select>
Now Preview It ,If its Ok. Click save template button.
I hope you will love this.