Hidden pictures are not moved-- they are just marked "hidden," and wherever they are normally seen they don't show-- but they are just as "there" as they were before. And the Library continues to own that picture, even though it doesn't show it.
In Photos, pictures aren't exactly "in" an album. When you "put a picture into an album," its name is added to a list of pictures from the Library that display together when the album is clicked, kind of like a music playlist, but for pictures. So two albums can both have the same picture name in their lists (like two playlists with the same song,) and that picture will show up when you click either album, but there's only one picture file-- it's just on multiple lists. And when you remove a picture from an album, its name remains in the lists of other albums, and the file still remains in your Library. You don't get fewer pictures in your Library because you remove one from an album; you just get fewer names in the album list.
So albums give a specific view of your pictures. The picture of "Aunt Ethel at the Grand Canyon" can be in the "Aunt Ethel" album with other pictures of Aunt Ethel, and it can also be in the "Grand Canyon" album with pictures of other people at the Grand Canyon. And it can also be in a the "September 2015" album with other things that happened then. Each album is pointing to a single file stored in the Photos Library, so having pictures in multiple albums takes up no more storage space. As you can imagine, this is very powerful in organizing pictures. Your pictures aren't confined to one album, and there are no duplicates made to put into extra albums.
Marking a picture as "hidden" just lets albums know not to show that picture, but it remains on the list. The Hidden "album" just shows all the pictures in the Library that have a "hidden' mark.