This was absolutely amazing! I played for more than an hour and a half, and I honestly think you deserve to win this jam. The idea of unlocking words as you progress works really well, and you absolutely succeeded in creating a dream-like world.
-Spoilers-
From what I understood, the goal of the player is to solve each character’s problem to wake them up from the dream world. They’re maybe all dreaming about something they worry about in their life—a mom having a nightmare about losing her child.
And about the man with a pillow on his head, I think he’s supposed to be "Mr. Sleep" (this does sound dumb tbh ^^). I think he may be the player’s subconscious, acting as a guide and giving clues here and there.
So I think the protagonist is trying to stay in the dream world so they don’t have to think about or worry about their real issues. That may also explain the ghost figures, thoughts or worries the protagonist had at some point.
I really feel like I’ve misunderstood a lot and missed a lot of stuff, so I hope your game gets way more attention so other people can experience it too. It really deserves it!