In Page Setup, make sure the Paper Size is correct ( custom size )
> It prints the first two lines on one label with lots of top and bottom margin
Yes I own one works fine. Just use one of their standard labels ( I use both the shipping and address one) and save the page setup in a script and you should be fine. No need to make a calculation on the label merge fields should work fine.
As Greg said, make sure the paper size is correct. Sometimes you need to make your layout just slightly smaller than the actual paper size.
Did you remove any Header and Footer that may have been automatically added to the layout?