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Traffic (formerly known as "dwell" since SL 1.5.13 (Jan 12, 2005)) refers to the amount of resident-related traffic a land parcel receives. Traffic is a total number based on the amount of residents and how much time they spend on that parcel. The owner is then paid an amount of money from a shared "pot" based on the total traffic their parcel has earned (this is being deprecated--see links below). Traffic is also used for listings in the Find window, such as "Popular Places".
Traffic was put in place as a way of gauging interest in a build or location. It replaced the Voting Stations system. Due to abuse by some residents using tactics such as "camping chairs" (chairs that you would get paid to sit in and "dwell" on the land at the same time), along with an economic inflation, payment from traffic will be removed. However, traffic will still be used for the Find listings.
Please note that the explanation of traffic above dates from 2005 and Cory Linden's explanation below dates from 2004. Both are no longer current.
More Detailed Explanation
Every user gets a set number of traffic points to give out during the 24 hours between midnight and midnight.
Any parcel of land that the user spends more than 5 sequential minutes on gets counted as a place that they spent time. [Separate] parcels owned by the resident (or group) are counted as if they were the same parcel.
The user's points are then evenly divided between those parcels. So, if I was online for 1 hour and spent 20 minutes on resident A's parcel and 40 minutes on resident B's parcel, resident A would get 33% of my points and resident B would get 66%. Alternately, if I only spent 5 minutes online and spent all of it on resident A's land, she would receive all of my points.
Those raw point totals are what is reported in the find window. To get from those to L$, we normalize the total against the total amount of L$ we are giving away that day (all L$ paid from traffic is taken from a shared "pot") and give out the money proportionately. If the owner is an individual, they just get the L$. If it is a group, then the L$ are split between the group members.