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.]