Squalor is caused by large population. The only thing which decreases squalor directly is upgrading to a larger city / castle. Happiness may compensate (prevent revolts) but you should avoid building too many buildings with population growth bonus. The bonus is percentage based and it really comes back to haunt you towards end game. It's great when your little village gains an extra 10 people per turn and becomes a town, but it really stinks when your huge city gets an extra 1000 people per turn due to the same percentage bonus. Be extra careful building things with population bonuses that cannot be destroyed later.