13.04 and later

The show-desktop icon is now a toggle option via System Settings - Appearance

12.04 and earlier

You could install MyUnity and there you will have the option to active "Show Desktop".

Note: As of May 2012, this places the Show Desktop icon above the Dash icon. This is a bug.

Only a workaround:

1. Install xdotool
2. Create a file ~/.local/share/applications/show-desktop.desktop

3. Paste the following into that file:

   [Desktop Entry]
   Name=Show Desktop
   Exec=xdotool key --delay 300 super+d
   Icon=desktop
   Terminal=false
   Type=Application
   StartupNotify=true
   

4. Make the file executable:

   Right click -> Properties -> Permissions -> Tick ‘Allow executing as a programme’

5. Now browse to that file in Nautilus and drag it to the launcher:

The problem with this is, that you have to wait a bit after you started the launcher before you can start it again. So you can not quickly do hide -> unhide. It actually works via the command line, so maybe there's a way to fix this, but I have no idea how.

Update for 11.10:

In 11.10 the shortcut super+d doesn't seem to work anymore. Instead use ctrl+alt+d. However, the above mentioned problem remains.

Update for 12.04:

In 12.04 you will be able to enable a launcher item via ccsm (Ubuntu Unity Plugin options → Experimental tab):

_{(source: xrmb2.net)}

Ubuntu 12.10

To add "Show desktop" icon in Ubuntu 12.10:

1. Launch Dconf Editor (from dash or otherwise).
2. Go to com > canonical > unity > launcher.
3. In favorites, add 'unity://desktop-icon'.

This icon can now be repositioned by dragging and dropping.

Source

You can also use compizconfig-settings-manager (ccsm) (instead of MyUnity) to adjust this setting.

Open CCSM, and click on Ubuntu Unity Plugin settings, then select the Experimental tab and check the box beside Show "Desktop Icon" in the launcher.

This will place the icon at the top of your dash, so you'll need to do as @Roland Taylor suggested and reset unity (unity --reset).

Additionally, you can show desktop using the Alt-Tab switcher

You can quickly show the desktop using the keyboard shortcut Ctrl + Super + D. I do not know of an option to use an icon.

When you are using Unity you got animations activated and could then use an edge binding. Whit this you even don't have to click.

You can install CompizConfig Settings Manager from the Software Center go to 'General Settings' (1.) then to key bingings (2.) and there you can choose an edge to trigger 'Show Desktop' (3.). There you also have the option to set an individual keyboard shortcut.

There is a "Show desktop" icon when alt-tabbing, so you can use alt-tab then shift-alt-tab to accomplish this.

Ubuntu 11.04

From webup8.org: ^{(With slight modifications by me)}

1. Install wmctrl.

2. Download the script and .desktop file, extract it and place the "showdesktop" script in the /usr/local/bin folder using the commands below:

   cd ~
   wget http://webupd8.googlecode.com/files/showdesktop.tar.gz
   tar -xvf showdesktop.tar.gz && rm showdesktop.tar.gz
   sudo mv showdesktop /usr/local/bin/
   

   If you want to manually download the file, get it from HERE.

3. Now you should see a file called "showdesktop.desktop" in your home folder - you can move it wherever you want (or leave it there) and then simply drag it to the Unity launcher and you'll have a "Show desktop" icon.

Known issue: when clicking the "Show Desktop" icon in the Unity launcher, you'll have to wait until the icon stops pulsating before clicking it again (that's about 10 seconds) or else the it doesn't do anything. You can middle click when the icon is pulsating if you don't want to wait (thanks to Mahdi for the tip!).

Reset Unity (unity --reset), and then reenable it, to put it back in the right place.