Do you mean the control on the phone, or on the earphones? Either way, it's actually a (very tiny) physical switch. When you increase or decrease the volume you can feel a little click.
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The screen on the iPhone is a Capacitative Screen. The Headphones however are much more rudimentary. They don't have a capacitative touch screen, but they do have a resistance based toggle switch. When the switch is depressed (Either up or down volume) it sends a signal through one of the four bands on the 35 mm jack. The four separations are very unique in this respect, as it allows for left channel, right channel, and microphone on three of the separations. The 35mm jack's 4th seperation, carries the instructions as they are passed from the toggle switch. So essentially, in the headphone there is just a toggle switch. While it is pressed down it sends a specific electrical signal back to the iPhone. The iPhone's logic then interprets the button press, and handles a single press, and a sustained hold, and controls the chip which feeds the audio signal to the headphones.
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