Objective The aim of this study was to determine the association of physical capability with health-related labor market outcomes among older workers. Methods The prospective risk of disability pension and long-term sickness absence (LTSA) of ≥6 weeks was estimated from physical capability on 5076 older workers (age 49-63 years) from the Copenhagen Aging and Midlife Biobank (CAMB). Physical capability was objectively measured through nine different tests (jump performance, postural balance, chair-rise, explosive muscle strength, maximal strength of the hand, back and abdominal muscles, lung capacity, and aerobic fitness) and linked to a high-quality register on social transfer payments among all Danish residents. Cox-regression analyses estimated the association of physical capability with risk of disability pension and LTSA. Results For all measures, low physical capability [≥1 standard deviation (SD) below the mean for each gender] was associated with increased risk of disability pension and/or LTSA, whereas high physical capability (≥1 SD above the mean for each gender) was not. A capability-response association was observed between the number of tests with low capability and disability pension and LTSA (P<0.0001) - with the risk-estimate for disability pension being 8.52 (95% confidence interval 3.98-18.25) when low capability was present in ≥5 physical tests. Population attributable risks analyses indicate that 42% of the disability pension cases were attributable to low physical capability whereas this was the case for 12% of the LTSA cases. Conclusions Using objective measures of predictors and outcomes, our study shows that low physical capability in midlife was associated with increased risk of disability pension and LTSA. The results indicate that increasing physical capability to an average level among older workers with low capability could potentially contribute to preventing >40% of premature exits from the labor market.