Does Diamond Skin scale?

Diamond skin for the Wizard is rare because it doesn't scale based on attributes, it is a flat amount of damage that is absorbed.

Although extremely useful in normal, I imagine it will not scale well in the higher difficulties. How can I increase the potency of Diamond Armor?

Diamond Skin scales exclusively with character level, though as mentioned it absorbs damage after reduction is calculated. The only way to increase its damage absorption directly is to use the rune that doubles its base absorption value.

Diamond Skin absorbs damage based on character level, at level 60 it will absorb 10.8k damage which can be doubled to 21.7k if runed with Crystal Shell.

DS comes into play after all other damage reduction is applied; thus it can be very useful even in Inferno provided you have a good multi-layered defense. The force armor low hp builds have been nerfed already, but you can read about those for more details on how they utilized diamond skin's non-percentage based defense.

There are also two passives that synergize with this skill:

Evocation: Will reduce the cooldown by 15%
Critical Mass: Can potentially eliminate the cooldown, by the time the initial spell expires you can re-cast to refresh the shielding.