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Sensor data typically consists of packets with small payloads due to which the MAC header is a significant and energy-expensive overhead. We present a scheme that replaces conventional MAC addresses with dynamically assigned short link labels that are spatially reused. This would be useful in self-configuring sensor networks. We also present an encoded representation of these labels for use in data packets. We develop a distributed algorithm involving local exchange of control messages for the assignment of these labels. Simulation results demonstrate the scalability of the assignment algorithm and the encoded label representation. In typical scenarios, the MAC header is reduced by a factor of eight as compared to traditional MAC headers. We also show the conditions under which the energy savings outweigh the protocol overheads.