The German became the highest paid player in Arsenal history last year when he penned a £350,000-a-week deal.
But Dixon says the deal has affected him and he is no longer the player he was.
“Signing him up on a big deal was seen as a must so as not to lose him,” Dixon told The Sun.
“That amount of money probably wouldn’t affect some players — but it looks as if it has softened him.
“He doesn’t look driven, he doesn’t look hungry.
“And when that happens you have a problem.
“He has let himself down over this period of time and if he was in a dressing room I played in, there would have been a sit-down chat.
“But Unai Emery has played it really well.
“He inherited a problem and he has dealt with it in a way he sees fit.”
Dixon’s former team-mate Paul Merson disagrees, however.
“Ozil should be the first name on the Arsenal teamsheet for the north London derby today,” he said.
“He’s had load of criticism including from me, but I’ve always said that while he’s there, you play him. His contract is a different issue.
“Arsenal have to win to have any chance of overtaking Tottenham and Ozil makes things happen.
“It’s all about the service to Alex Lacazette and Pierre-Emerick Aubameyang for Arsenal and there’s no-one else there who can do what Ozil can do.”