Modeling Wage Expectations and Long-Memory Dynamics in the German Labor Market, 1914-1920

This study simulates the labor market dynamics in Germany during 1914-1920, focusing on the impact of World War I on wage expectations and economic stability. Built upon the historical context of the period, the simulation takes into account the initial wage hikes driven by involuntary unemployment and the exodus of workers from civilian industries to war-related industries. It then explores the subsequent stabilization of wages, as observed in the empirical reality of the era. Using simulated data, the paper examines how workers’ expectations of future wages were shaped by current wage conditions amidst the economic strain caused by the war. The study also investigates the role of national unity, government policies, and institutional frameworks in preserving wage stability during market volatility. To analyze wage dynamics, the research applies a dynamic wage model alongside the FIGARCH (1, d,1) model, estimating long-memory effects in wage volatility. The findings suggest that past economic conditions played a significant role in shaping current wage expectations, with light long-memory properties observed in wage volatility. This simulated analysis offers insights into how economic pressures and government interventions during wartime may have contributed to wage stability, shaping the uncertainty of workers into forecasting the war ending which goes in accordance with the martingale hypothesis of wages expectations. Our study is contextual and qualitative and discusses the properties of economical series based on the context of the period.