on Jane Friedman site:

Subtext refers to characters who talk about one thing but really mean something else, and they both know it. And we’ve all done it, right? The subtext is the real conversation hidden by surface talk and is the core of the communication.

Through subtext, writers can provide information laced with sarcasm, heartbreak, or humor. And it always deepens the story with unpredictable outcomes and emotion. Characters engaged in the conversation know the hidden meaning; it’s an unspoken conversation below a verbal conversation and more valuable than the spoken word.

Why not have the characters state the obvious instead of flirting with the real topic? Isn’t it a waste of time for the writer and the reader? But communication that fulfills only one purpose is like serving a meal with no salt. The result might satisfy the tummy, but the experience is tasteless. Dialogue written without layers reduces the reader’s engagement in the story.