use File::Find;
use strict;

my $bak_ext  = '.bak';
my $root_dir = 'C:/Temp/Chris/';

find(\&fix, $root_dir);

sub fix {

    # if the extension fits...
    if ( /\.xml?/i ) {
        print "Processing $_\n";
        my $new = $_;
        my $bak = $_ . $bak_ext;
        rename $_, $bak or die "Cannot rename $_ to $bak: $!";

        open OUTPUT, "> $new" or die "Cannot open $new for writing: $!
+";

while ( <OUTPUT> ) {

Print Go Go Go;

my $TheLine = $_;

s/<label>([^<]*<\/label>)/<label denominator=no auto.number=no>$1/i;

   print OUTPUT;
}
}
close OUTPUT;
}
[download]

What are you expecting while (<OUTPUT>) to do?

Looks like what you really want is an in place edit. Someting like this may get you to where you want to be:

use strict;
use warnings;
use File::Find;

my $bak_ext  = '.bak';
my $root_dir = 'C:/Temp/Chris/';

find(\&fix, $root_dir);

sub fix {
    # if the extension fits...
    return if ! /\.xml?/i;
        
    print "Processing $_\n";
    
    # set up in place edit
    local @ARGV = ($_); # 
    local $^I = $bak_ext;
    
    # Edit the file
    while (<>) {
        # Edit $_ (the current line) as required here
        print; # Write out the new version of the line
    }
}
[download]

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DWIM is Perl's answer to Gödel