Local independence can be explained by an example of Lazarsfeld and Henry (1968). Suppose that a sample of 1000 people was asked whether they read journals A and B. Their responses were as follows:
One can easily see that the two variables (reading A and reading B) are strongly related, and thus dependent on each other. Readers of A tend to read B more often (52%=260/500) than non-readers of A (28%=140/500). If reading A and B were independent, then the formula P(A&B) = P(A)×P(B) would hold. But 260/1000 isn't 400/1000 × 500/1000. Thus, reading A and B are statistically dependent on each other.
If the analysis is extended to also look at the education level of these people, the following tables are found.
Again, if reading A and B were independent, then P(A&B) = P(A)×P(B) would hold separately for each education level. And, in fact, 240/500 = 300/500×400/500 and 20/500 = 100/500×100/500. Thus if a separation is made between people with high and low education backgrounds, there is no dependence between readership of the two journals. That is, reading A and B are independent once educational level is taken into consideration. The educational level 'explains' the difference in reading of A and B. If educational level is never actually observed or known, it may still appear as a latent variable in the model.