The paper surveys the current state of the Arab economy in Israel. First, it documents key facts, including government policy plans. It then presents a dynamic equilibrium model of human capital and labor market barriers faced by the Israeli Arabs. Both the descriptive statistics and the empirical implementation of the model show that there are still significant gaps in economic performance between Jews and Arabs in Israel, despite some narrowing of the gaps over time. In particular, Arab men are concentrated in low-skill, low-wage jobs and Arab women’s labor force participation is relatively low.