This paper first introduces a parametric binary tree labeling scheme (PBTL) to label image pixels in two different categories. Using PBTL, a data embedding method (PBTL-DE) is proposed to embed secret data to an image by exploiting spatial redundancy within small image blocks. We then apply PBTL-DE into the encrypted domain and propose a PBTL-based reversible data hiding method in encrypted images (PBTL-RDHEI). PBTL-RDHEI is a separable and reversible method that both the original image and secret data can be recovered and extracted losslessly and independently. Experiment results and analysis show that PBTL-RDHEI is able to achieve an average embedding rate as large as 1.752 bpp and 2.003 bpp when block size is set to 2 x 2 and 3 x 3, respectively.