If you're using steam
C:\Program Files (x86)\Steam\steamapps\common\Dawn of Fantasy\
You will find Log1 through Log5 there. If you have installed Steam to a different directory, find its folder and follow the folder path I listed there.
This lag only occurs while city is selected in the world map. When it happened to me, I had ~60 peasants. If the resource they were working on emptied, they would stop for a moment and pull out of the "wood" grouping of peasants and go to the hand symbol. This also occured on stone/gold peasants. A brief moment later they would switch back to what they were doing. If you watched my screen you would see groups change constantly, roughly 1 every 2 seconds.
Still confident the lag is from group changing =)