Happiness affects villagers production rate.

There are currently four things that can increase/decrease happiness.

1. food - Your villagers need to eat. Depending on how much food they get (you can set rations in management tab) they will gain or loose happiness.
2. heating - Your people will be happy and their happiness will grow if they can warm their houses during [winter]. If there is not enough [fuel] then their happiness will decrease
3. clothes - Villagers need to wear clothes that wear out over time.
4. alcohol - To get happiness over 75% you need to supply alcohol in a [tavern]