OK, I did additional experiments and found that this is a single dimension, and measured on both x and y axis.
This is most dramatically apparent when we select the "Internal" position option, and then drag the label around. We see 9 boxes, that show all possible drop zones. The position of these boxes changes when we change the "distance" parameter. So when we enter a small value, the boxes spread out very near the border of the node. If we enter a larger value, all the boxes move toward the center.