This is the secondary rendering of [text] layers when using the [type] tool. Paragraph Text will render the content of the [text] layer based on the size you draw the [text] layer.

Paragraph Text is used if you select the [type] tool, then click+drag the [type] tool to draw the text layer, then start typing. This action will enable Paragraph Text and calculate the size of the text area based on the size you draw the [text] layer