I am fairly certain that the affect of losing personnel as prisoners of war is taken into account when adjusting National Will and perhaps production. Is the effect on production and national will of housing and feeding (or indeed not properly doing so) large numbers of POWs for the countries holding prisoners taken into account as well? The cost of caring for POWs had particularly negative internal effects in Austria-Hungary, Serbia, and Russia. The effect of feeding and housing thousands of men cut deeply into available food supplies in Austria. While they were used to good effect in agriculture, mining, road construction, and fortification building in Italy, France, Austria-Hungary and Germany attrition among POWs was significant.
As an aside Austrian POWs were particularly ill treated by the Serbs. During their epic retreat from Serbia to the Adriatic coast over 70,000 Austrian prisoners were forced to accompany them. Only about 24,000 reached the coast and were transferred to Italian control, while less than 12,000 survived to be transferred to France by the summer of 1916. Knowledge of this attrition definitely impacted Austrian home moral.
Most importantly the number of POWs resulting from battles in this game seem very low when compared to historical statistics for battles of similar scale. I may not have properly paid attention to this but it seems as if only the winner of a battle records prisoner captures. As everyone knows both participants in battle, even a badly losing side, would capture prisoners, not just the winner of the battle. The algorithm determining battle losses needs to be adjusted to reflect more historical results.