This chapter surveys the current situation of the Arab economy in Israel and presents an empirical analysis of the barriers facing Arab society. All indicators of the Arab economy in Israel point to inferior outcomes. This situation exacerbates the inherent problems of the Arabs in Israel, who constitute a big minority. The relatively low level of economic development impacts the relations between Jews and Arabs and hinders the creation of an integrated society. A predominant feature of Arab men in Israel is their high concentration in low-skilled and low-paying occupations, while a salient characteristic of Arab women is low labor force participation. The gaps between the Arab and Jewish populations are the result of pre-labor-market barriers to investment in human capital, as well as barriers related to the labor market itself. While the data point to an improvement over time in most domains, significant gaps with respect to the Jewish population persist. We empirically test the relative effects of each of the afore-cited barriers. Key findings include an upward trend over time in barriers to the acquisition of human capital in highly skilled occupations, concurrently with a decrease in labor market barriers in all occupations.