The Israeli economy is surprisingly resistant.Following the financial crisis, the unemployment rate was virtually unaffected, remaining at approximately 6.5 percent. This stands in sharp contrast to the average OECD unemployment rate, which jumped to 8.2% as a result of the Great Recession. To further put Israel’s extraordinary feat in perspective, consider that Greece had a similar unemployment rate to Israel before the crisis, but by 2013 Greece’s unemployment rate had nearly quadrupled.Focusing on unemployment rates, it is clear that the Israeli economy is and has been performing commendably. However, when the focus shifts to poverty statistics, a different, more troubling picture emerges.Poverty rates in Israel remain stubbornly high, and one of the main reasons is the severe shortage of skills found among two large minority groups in the country: Israeli Arabs and the ultra-Orthodox (haredim). According to recent statistics, 50% of Israeli Arabs and 60% of haredim live below the poverty line. These are staggering figures. They are at least five times greater than poverty rates for the rest of the population.The sobering poverty statistics among Israeli Arabs and haredim are largely attributable to pitifully low labor-market participation rates. In other words, the number in or seeking a job is comparatively low. Whereas in OECD countries, 77 percent of the working-age population is either in a job or attempting to get one, in Israel the rate is a far lower: 66%.The overall labor-force participation rate in Israel is significantly depressed because Israeli Arabs have a participation rate of just 52% and the haredi participation rate is an even lower 45%.A key reason the participation rate is so low among these minority groups is because Israel’s economy has a relatively high demand for skilled workers. In Israel, almost half the working population has a “tertiary education.” The OECD average is lower, reaching only one in three. Having a tertiary education means one is trained in either highly skilled fields like dentistry or low-skilled (vocational) professions like carpentry. The tertiary-educated employment rate in Israel is a very respectable 85%.The lack of formal skills acquired by Israeli Arabs and haredim explains much of their economic inactivity.Without the required training, and given the structure of the Israeli economy, they have little hope of securing a job. Further, why bother trying to secure a job when you are out-skilled and out-qualified? Lacking skills not only makes one far less employable but also dampens the motivation to try to succeed in the labor market. Combined with generous government transfer payments to the unemployed, the prospects for successful Israeli Arab and haredi labor-market absorption are quite dim indeed.So how can the problem of lack of skills and poverty among Israeli Arabs and haredim be solved? Direct government intervention certainly does not seem to be the answer. Israel spends almost 1% of GDP every year on labor-market policies, with very little value for money.The government’s historical record at vocational training can even be characterized as abysmal. Specialist vocational tracks in Israeli schools were abolished in the 1970s due to lack of demand and in 2011 just 2% of the unemployed signed up for vocational education programs.Therefore, the time may be ripe for alternative approaches. One particularly attractive alternative is to further engage the private sector in human capital production for the unemployed. For example, the government could reduce tax burdens on private-sector firms in return for creating or expanding in-house training programs and showing success in progressing trained individuals into full-time hires.The private sector and the economy as a whole gain from this alternative approach because jobs are created at less cost to the employer, new employees receive tailor-made training and the newly trained develop a natural loyalty to the company thereby increasing retention rates. Further, it is a much more attractive prospect for an out-of-work individual to undergo training inside a real firm, since one gains the added benefits of a network of contacts and greater potential to secure a job straight after training qualification.It is important to note that some non-governmental training has seen limited success. For example, the Kemach Foundation has funded education and apprenticeship programs for thousands of haredim and has boosted their employment prospects. However, the program has been criticized as being too insular.It does not place students into in-house training with firms.A better large-scale model for Israel may look something like the North Carolina Apprenticeship 2000 program in the United States. Here, employers and government share the cost of training employees in high-value industries like manufacturing and technology.Students spend over 6,000 hours learning with a sponsorship company and graduate with a nationally respected degree and invaluable industry contacts to seek employment. Students are expected to earn at least $34,000 per year after graduation.In the current Israeli regime of heavy government control over the apprenticeship market, the vast majority of vocational students are not training in firms like in North Carolina. Rather, they are placed in external centers. Only 4% of Israeli apprenticeship students receive training directly from employers during their studies.One bright spot in the story is that government funding for ineffective vocational education has steadily declined since 2002. This offers an opportunity to take advantage of on-going budgetary savings and further incentivize the private sector to nurture unskilled workers under their own in-house programs.Israeli Arabs, the haredim and the Israeli economy as a whole are likely to be much better off as a result.Alex Benedyk is a Research Fellow at the Jerusalem Institute for Market Studies. Robert M. Sauer is a professor of economics at the University of London, Royal Holloway College, and president of the Jerusalem Institute for Market Studies.