Is my dimmer switch failing or is it bad wiring?
If wires spark enough to generate a burning smell, you'll hear the arc and it's also possible the breaker would go as well. 

From the symptoms you describe it sounds like the dimmer itself is going. Since it has a burning smell, I would say it's unsafe to use and you should replace it immediately.

Of course, if you see any nicked wires, or any of the wire nuts are loose then you should fix those problems. Be sure to turn off the power at the panel when you're doing this (you should check with a non-contact voltage detector just to be safe).