Lots of differing opinions on this one. My own instructor was an ex-ag pilot. He'd quite often turn up wearing only shorts and sandals, but he could still show most instructors a thing or two about handling skills. As for protection from fire, he didn't seem to give a $-hit.
As Shortstripper says, those who HAVE to wear a uniform have no choice. Those who do have a choice and still wear a blue woolly pully and epaulettes for GA & club flying seem to have (IMHO of course) a bit of a problem with image. Maybe it goes with the smart 'flying school' clubhouse image that most people seem to expect these days. If I woz an instructor, I'd probably wear smart jeans, desert boots and a polo shirt, but that's what I tend to wear for flying anyway!
Its the same with 'Leather Pilot Cases'. How many 10 hr students do you know that go out and buy one, because it's seen to be 'an essential bit of kit which all pilot have'?
Any aviation psychologists (or psychiatrists for some instructors) on the forum care to comment?
Its the quality of the instruction that counts, not what the instructor is wearing.
Edited for Political correctness and to avoid upsetting the sensitive characters among us.