I have configured Jupyterhub for Gitlabauthenticator but some how jupyter is unable to create system user which cause 500 internal server error. And if I used LocalAuthenticator class its overwriting GitlabAuthenticator class.
Could you share the JupyterHub logs to be able to answer your question?
How are the usernames of your GitLab instances? Linux does not allow any format for usernames. Check docs for constraints that you need to respect.