It's a little unintuitive. Assuming the element you are labeling is a wall (but it is the same for many tools), the Label Settings button is greyed out for a placed wall, but not for a default wall (ie. a wall yet to be placed).
This button simply provides a direct link between the wall tool and the label tool. Thankfully we can still go directly to the label tool and set the default wall label. Do this by selecting the wall item from the list and setting up it's appearance inclusing the text. Since the button is greyed out for existing walls, we are forced to take this route, then go back to the wall setings and simply check 'Label Wall'. Don't ask me why.
Alternatively set up a default wall with the label checked and inject the parameters into existing walls.
Cheers,
Link.
