Happiness in players is not very well understood and may seem fairly pointless or even broken. It is a fairly weak rating but actually it does it's job, though it's very simplistic.
One misconception is that happiness and morale are closely related, but actually they're not. There is some minor affect on morale but it's quite small and morale rockets up far faster through other actions, such as training and match results. It may have some impact in the early weeks of the season when you're rushing up to max morale, but I couldn't say for sure if it's noticeable.
Happiness, unlike morale, has no affect on match ratings. It's purely for deciding whether or not the player will sign a new contract. A rating of 250 will mean he'll sign a 1 year contract. 500 = 2 years, 750 = 3 years and 1000 = 4 years (the max). Only two things will affect a player's happiness - wages and match appearances. Unlike other ratings in the game, there is no limit at all on how much happiness can rise or fall in a single week. I can't remember the exact figure, but for every £X above or below the wage that the player EXPECTS to be paid, he'll gain or lose a point of rating. If for example it's £100 per rating and the player expects to be paid £5,000 per week, but you pay him £6,000, then he'll gain 10 points of happiness per week. Ideally, you'd want to be paying your players the exact amount that they expect, just enough to keep them happy enough to sign a new contract.
There has been an obscure bug since the game was written where a player would be at 1 happiness (the minimum) for reasons that I couldn't fathom, but I think Rich has solved it. When a 17 year old signs up as a pro in a new season, he'll be paid £250 per week, which will probably be thousands less than he expected. If my guess of £100 per rating above was correct, and the player has been paid £10,000 less than he expected, he'll lose 100 points on the first week of his pro career. If it's not corrected fast, he may reach the lower limit. This has probably gone unnoticed most of the time, since he has a contract anyway and people will correct his wages shortly afterwards. By the time he's ready for a new contract next season, his happiness has probably already risen back above 250, especially if he's been getting games. I plan on fixing this, if it is indeed the reason for the bug, although I've never seen it affect anybody anyway.
Incidentally, for those who are thinking that they could get away with paying very low wages, but also playing the player, enough to keep him happy, it's a fairly fine line. You could probably get away with paying a player a few hundred pounds less than his expected wages, perhaps £1,000 or so, but you'd run the risk of his happiness dropping below the point where he'll not sign a new contract. Even worse, if you then dropped him for a match and didn't boost his wages, you may end up with a player who won't sign. It's definitely safer to pay a player slightly too much than not enough.
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