How would cutting hours work? Assuming the business is being run with reasonable efficiency, cutting hours worked will decrease the amount of product produced, decreasing income, and causing the business to shrink.
I don't think cutting hours would work. But it's a ridiculous argument anyway. The reason people resist having their wages cut is because the buying power of their money is not increasing. People in an deflationary society would fear inflation because they'd say employers wouldn't be willing to raise wages because in their society they cut them.
Krugman is essentially saying that employees are irrational and won't accept a decrease in wages even if their purchasing power still increases. If that's so, it's only because an inflationary economy has made them that way.
We expect wages to go naturally go up over time and resist reductions in our wages because that's what has to happen in our society for our purchasing power to even stay the same.