Since email generally traverses the internet unencrypted, the consensus is that it's already insecure. There's little to be gained by encrypting it after the fact.
Besides that, what key would they encrypt it with? Something from your password? What do they do with email you get while not logged in? How do you build a search index? I'm actually building something similar, and even after a lot of effort, there's tons of corner cases that simply cannot be protected, so it seems a reasonable guess that gmail does nothing special to encrypt your data.
[edit to add that once you include oauth in the picture, I think the encryption story starts getting really fuzzy.]
Even if the data is stored encrypted, Google can always decrypt it on an as needed basis (since they serve ads based on the content of the email messages.)
It doesn't really matter. Any method of server-side encryption for email (and many other) systems as we currently understand them has inherent flaws.
The simple fact is that key material is accessible in RAM, and even if it weren't, the data still must be decrypted at some point, and once the server is compromised, you can likely capture that decrypted data.
That's not to say you shouldn't do it -- it helps prevent accidents like unwiped drives getting out, and might be a reasonably effective obfuscation against some attacks, but it just isn't secure in the same way that real end-to-end encryption can be.
