When the financial crisis struck the United States and Europe in 2008, destroying jobs and depleting bank accounts, Israelis managed to get by largely unscathed. Indeed, to some people, the country looked like a financial juggernaut. In 2009, “Start-Up Nation,” a book co-written by Dan Senor, who had been a spokesman for the Coalition Provisional Authority, in Iraq, was released; it attempted to explain Israel’s “economic miracle” with zingers like “the West needs innovation; Israel’s got it” and chapter titles such as “The Little Nation That Could.” In the years after the recession, the country continued to prosper; as the developed world grappled with the consequences of their public debts, Israel’s debt-to-G.D.P. ratio shrunk. Last September, Prime Minister Benjamin Netanyahu described the Israeli economy as an “island of stability.”

So it came as a shock to many when, in May, the Organization for Economic Cooperation and Development released a report showing that, of the world’s thirty-four economically developed countries, Israel is the most impoverished. With a poverty rate of twenty-one per cent, Israel has a higher percentage of poor people than Mexico, Turkey, or debt-ridden Spain and Greece. The report’s findings made front-page headlines in Israel, and officials there scrambled to sound both indignant and unconcerned. They had some explaining to do: How does a nation with double the average growth rate of other countries in the developed world have a fifth of its population living in poverty?

One answer is that it may not. The O.E.C.D.’s report examined relative poverty, using as its yardstick the percentage of each country’s population earning less than half of that country’s median wage. By contrast, in the U.S., poverty is typically measured in absolute terms—a given household’s purchasing power. Some critics have suggested that this discredits the report, since, by the O.E.C.D.’s standard, even if everyone in the country were suddenly made ten times richer, the poverty level would remain unchanged. And yet even when measured in absolute terms, by Israel’s National Insurance Institute, twenty-two per cent of Israelis were still deemed to be living in poverty in 2011, the last time the N.I.I. conducted the survey. (The poverty rate in the U.S. that year was fifteen per cent, according to the Census Bureau.)

“There’s the story we tell the world, about Israel as a ‘start-up nation,’ and it’s a very nice story, but it only applies to about five per cent of the population,” Guy Rolnik, the founding editor of the Israeli financial newspaper TheMarker, told me. “When you look at the labor market, our economy is backward. We have a very low productivity rate.”

How did this happen? Increasingly, the debate in Israel seems to pivot around the issue of low participation in the labor market. According to Yarom Ariav, who served as the director general of Israel’s Finance Ministry until 2009, and to other economists I spoke with, the answer is straightforward, and has to do with a concentration of poverty and high unemployment among two large minority populations—ultra-Orthodox Jews, known as haredi, and Arab Israelis. The problem is especially acute among haredi men and Arab Israeli women. Only forty-eight per cent of ultra-Orthodox men of prime working age were employed in 2011, according to the latest annual report by the Taub Center for Social Policy Studies. Only twenty-eight per cent of Arab Israeli women were employed and, of the Arab women who did not finish high school, only five per cent had full-time jobs. (The employment rate for haredi women rose in the mid-aughts, though it peaked at just sixty per cent; among Arab men, the employment rate resembles that of Jewish men, though their wages tend to be significantly lower.) “Because the participation rate for haredi men and Arab women is so low, we got to a place where poverty is concentrated among families that have many children, and whose inclination to go out to work is already diminished,” Ariav said.

This hasn’t always been the case. Until the nineteen-eighties, almost ninety per cent of haredi men were employed, but “over the past thirty years, their employment rates have dropped like a rock,” Dan Ben-David, a professor of economics at Tel Aviv University and one of the report’s co-authors, told me. One of several factors behind the decline is an increased ultra-Orthodox influence in Israeli politics, which has resulted in more government subsidies and housing, and new exemptions from the military service that is mandatory for almost everyone else in the country. It has allowed more haredi men to stay out of the work force and devote their time to their faith, and led to an increased isolation from the state’s secular institutions. Perhaps the most important factor adversely affecting the demographic’s employment seems to be the proliferation of an independently run haredi education system that emphasizes religious studies and isn’t obligated to teach core subjects such as science, mathematics, or English past the eighth grade—and often stops well before that. (Schools for haredi children of European descent have existed since the nineteen-fifties, but the boom in the independent education system came with the establishment, in 1987, of schools for ultra-Orthodox children of Middle Eastern and North African descent.) Until recently, the drop in haredi employment has been largely obscured in poverty reports like the O.E.C.D.’s, owing to the welfare benefits that the community has been collecting from the state for years, particularly child benefits, which are crucial for a group in which the average family has 6.7 children. Those payments were cut sharply in 2002, with the onset of a national economic meltdown triggered by the second Palestinian intifada.

Others think it’s a mistake to focus on these two communities. “I object and oppose this finger pointing at Arab women and haredi men,” said Shlomo Swirsky, the director of the Adva Center, a non-profit research institute. Citing the same unemployment figures, Swirsky stressed that he saw these populations as victims of the problem, not the root. “This is especially true in the case of Arab women,” he said. “Any cultural explanation that talks about ‘Arab culture,’ and complains that they don’t let their women work, is bullshit.” As an example, he mentioned that, while employment among Arab Israeli women has consistently been low, and their wages abysmal, hundreds of them used to work in the textile factories that operated in the Galilee region in northern Israel. But many of those factories have since shuttered and moved to Jordan, where labor is even cheaper. The problem, Swirsky said, is not cultural, but stems from the fact that “big businesses don’t try to reach those areas.”

After protests broke out in 2011 over the rising cost of housing, Netanyahu set up a committee for socioeconomic change tasked with making economic recommendations to the government; he appointed Manuel Trajtenberg, who chairs the planning and budgeting committee at Israel’s Council for Higher Education, as its head. When I asked Trajtenberg if the committee members had agreed on what needed to be done, he said that there was a clear consensus: restrict the monopolistic power of large corporations, limit pay for executives of public companies, and begin to tackle the issue of labor-market participation. “We need a concerted effort to tackle these two populations, and that effort has to entail an investment in higher education,” he added. Already, he said, there is some movement— haredi employment is improving, and it seems as though more of them will soon be drafted into the military. Within five years, he said, “the difference will be felt.” With twenty per cent of Israeli children currently enrolled in the haredi system, and twenty-eight per cent of Arab Israeli children receiving an education that is below that of many third-world countries, the change can’t come soon enough. “The primary problem, which was masked by the benefits, is that a large proportion of Israelis are not given the tools to work in a modern society,” Ben-David said. “If things continue as they are, we are heading to a third-world economy.”

Photograph by Ahikam Seri/Bloomberg/Getty