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This study investigates the increase in unemployment rates and decrease in labor force participation of the Palestinian minority in Israel over the last decade. It attempts to determine why the Palestinian citizens in Israel experience higher rates of unemployment and exclusion from the labor market than the Jewish population. In order to answer this question, the study looks at the main changes in the Israeli economy and examines the elements that affected the Arab minority during the 1990s. Such elements include Jewish immigration from the U.S.S.R, privatization and economic liberalization, and a new hi-tech industry.