This device has two advantages. First, it gives the audience an excuse for why “real” characters are singing and dancing. This is the first problem that must be solved in any movie musical. Putting the numbers in Roxie’s head not only lets the audience enjoy the pleasure of song and dance, it makes the music come from character.
Second, the device lets the filmmakers avoid the other great problem with movie musicals, their length. Movie musicals have to tell a complete story and also do ten or so songs. Typically, the story comes to a grinding halt while a song is performed. And while the songs may be lovely, the leapfrog of story and song can seem interminable.
But using the fantasy device in Chicago, the filmmakers are able to cross-cut story material with the musical number, thus making the overall film considerably tighter.
Catherine Zeta-Jones does an excellent job pretending to be a dancer. But no amount of trick editing and skirted costumes can hide the fact that she is too heavy for the part. And when the “women behind bars” dance number comes on, the sight of women who can dance makes it clear just how much we lose aesthetically by having to use a star instead of a professional dancer.