Jacob has a developmental disability.
Besides being the Cloud Cuckoo Lander of the main trio, he's the only one who can't read, write or tell time yet, and in the back-to-school special Live and Learn, he doesn't go to school with Iggy and Gloria despite being apparently the same age as they are. The episode "Show and Tell" reveals that he goes to a different class. It might be that his class is for special needs students. Gloria, Iggy and Jacob are just figments of Holly's imagination.
See Poison Oak Epileptic Trees on the YMMV page.