By default, Jenkins runs each configuration build in its own unique directory (this happens by appending the name and the value of the axes to the workspace of the overall matrix execution, for example, /path/to/slaveroot/job/someMatrixJob/axis1/value1/axis2/value2/). Specifying this value allows you to override this behaviour.
A common value used here is ".", indicating that all the configuration builds run on the same directory as the overall matrix execution.
The path specified here can be either absolute or relative. If relative, it is resolved against the workspace of the overall matrix execution. The value can also contains environment variable references. Environment variables include all the axis values, so for example if you specify $FOO when you define two axes FOO=[a,b] and BAR=[x,y], then FOO=a,BAR=x and FOO=a,BAR=y will build in somewhere like /slaveroot/job/someMatrixJob/a/ while FOO=b,BAR=x and FOO=b,BAR=y will build in /slaveroot/job/someMatrixJob/b/. In this way, you can be selective about what subset of configuration builds share the same workspace and what doesn't.
Environment variables include special tokens ${COMBINATION}, which expands to axis1/value1/axis2/value2/..., and ${SHORT_COMBINATION}, which expands to 8 character string unique to each configuration.