IDENTIFICATION PROBLEMS IN ECONOMICS. Kids, a rough way of looking at identification problems is to consider the problem of trying to determine the effect of more than one variable in causing something to happen. A good experiment, as explained by Richard Feynman, will proceed to eliminate all alternative explanations so that there is only one variable which can have a causal effect. In a randomized controlled experiment, controls are used to changes in any variable other than the one that is being studied.
I found an explanation from an economist’s point here. It has a good explanation of the standard example in economics—how do you tell whether a change in price was mainly caused by supply side factors or by demand side factors? However, the other example in the post is perhaps more familiar: “Suppose you want to know the effect of an extra year of school on wage rates. You could collect information on individuals’ earnings and years of schooling and estimate the relationship between the two. But there’s a problem—the people who got a lot of schooling are not a random sample of all workers—in general, people with more schooling stay in school for a reason. And one reason is that school may be a better investment for ‘high ability’ workers than for ‘low ability’ workers. If that’s the case, then the premium that workers with high levels of schooling receive over others will reflect both the effect of additional schooling as well as higher average ability levels—in other words, those workers may have earned more even if they had stayed in school no longer than the low-schooling group.
So how do you disentangle the effects of ability on wages from the effect of schooling? How do you solve the identification problem?”