Happiness is required for countries which have any sort of technology or education at all, with greater levels being required as the expectation (and tech/edu levels) of the populace increases. A country with an unhappy population can expect a decrease in the work of some sectors.
Also, the morale of your land units is determined by the happiness of your people. The morale of a unit can be set by the player, but the minimum level allowable depends on happiness. See "info morale" for details.
The nation command will display, among other things, your current happiness level.
The procedure determining happiness level is exactly the same for happiness as it is for education (see "info Education") except for the fact that "happiness log base" is always 6.0 and "easy happiness" is always 5.0. New happiness is averaged with old happiness in the same way that education is averaged except that happiness averaging has its own line in the "version" output: Happiness is averaged over 48 time units.
It has also been rumored that increasing happiness will help to keep the rebels in check somewhat, but the exact results are sketchy at best.
See also : Education , Innards , nation , Products , Research , Technology , attack , Nations , Producing , Updates