OBJECTIVES: As in so many other countries, Diabetes is one of the largest health problems faced by Portugal.  Up to now there have been no “cost of illness” studies for diabetes in Portugal. This paper provides a contribution to fill that gap by estimating the indirect costs of illness, more specifically the output loss due to short and long term disability attributable to diabetes in Portugal. METHODS: The estimates are based on the microdata of the 4th National Health Survey conducted in 2005/2006. An employment logit is estimated with covariates including age, gender, education levels and regional dummies as well as a dummy for diabetes and dummies for other relevant health conditions for all people in the survey with ages between 20 and 74. A comparison of the baseline labor market participation/employment estimates and model predictions assuming zero diabetes prevalence provides the estimates for the labor market impact of diabetes. The estimates are specified by age-groups and gender. At this point the analysis uses microdata from the Labor Ministry, covering about 3 million workers, to estimate gross wages and employer Social Security contributions by age and gender, allowing us to use the human capital approach to put a value on the diabetes induced labor market non-participation. RESULTS: The non-employment estimates generated by the logit based methodology are that diabetes reduces employment by 22,150 in a 4.6 million demographic group. The corresponding output loss is estimated to have been €324 million. CONCLUSIONS: The output loss is one of the main costs of diabetes in Portugal. Its amount is four times larger than the available estimates for diabetes’ attributable inpatient care in National Health Service hospitals.