Ideogrammic compound (會意): 羊(“sheep”) + 㳄(“saliva”) – to envy.
羊 may be interpreted as a beautiful sheep or good mutton (cf. 美 “beautiful” and 善 “good”).
The Kangxi Dictionary, following 《佩觿》, enters the word in etymology 2 as 羡, separating it from 羨 (etymology 1). This is also followed by dictionaries such as Hanyu Da Cidian and Dai Kan-Wa Jiten, but Zhongwen Da Cidian disagrees with this treatment. (Hanyu Da Zidian regards 羡 as the main form of all pronunciations.) According to 《說文解字羣經正字》:
羨, meaning "to covet", is now frequently written as 羡 in the classics. Guo Zhongshu's Peixi distinguishes 羨 and 羡 as separate characters. 羡, fanqie 以脂, name of a place in Jiangxia. 羨, fanqie 似面, to desire. This is not the case. There's no such character with the 次 element in character dictionaries. There is only one character but several pronunciations.