A Square-2 has the move group <(1, 0), (0, 1), />. Once corners are paired and you've reduced to a Square-1, you're still left with edges that have a "width" of (1, 0). So the move group remains <(1, 0), (0, 1), /> because you still have unpaired edges to deal with.
Hmm I see what you're saying. But in this case it comes down to something technical, which is as much as I expected.
If I were to apply a more intuitive meaning of "move group", then it is obvious reducing a Square-2 to a Square-1 does reduce the move group. For just as in 4x4, when reduced to a 3x3, we can no longer slice through the middle (ignoring parity), when we pair the corners on a Square-2, we can no longer slice through them. This obviously reduces the number of
moves available to us. Technically the move (0,1) is still available because of edges. But this is just something that is inherent to the puzzle in how it functions. Really, what you're leaning on when you say it doesn't reduce the "move group" is a technicality (ergo, in my opinion, meaningless).
I'm not saying reducing to a Square-1 is the best method, just that TMOY's example was poor. If you think of it like this: A Square-2 is just a Square-1 with more cuts through it. In the same way, a 5x5 is just a 3x3 with more cuts through it.
^ What I was trying to get at is the fact that we don't seem to cut out any moves by reducing a square 2 into a square 1. However with 4x4x4 > 3x3x3, if we ignore parity, we've essentially removed the necessity of using double layer turns, thus making it easier to solve.
Even if I couldn't solve a 3x3x3, reducing a 4x4x4 to a 3x3x3 still makes sense for the reason I've mentioned. But what if I couldn't solve a square-1. Does it seem sensible at all to reduce a square-2 to a square-1?
It's up for debate whether removing double layer turns makes a 4x4 easier to solve. Also, considering the fact that reduction makes up at least 50% of the solve (in the vast majority of cases, and certainly much more than 50% for 5x5+) this is a fairly weak argument.
But the more I think about it, reducing a Square-2 to a Square-1 makes sense. Rather than looking at it as a reduction method, you can look at it as another step in solving the puzzle. That is (depending on how you solve a Square-1):
1) Pair corners
2) Orient corners
3) Orient edges
4) Permute corners (parity)
5) Permute edges
Steps 1 and 2 could possibly be integrated too... I don't have a Square-2 to try on though.
To be honest I'm way out of touch with Square-1 these days (I had to look up my alg sheet to remind me of how I solve the thing). What I'm getting at is I'm not sure what the pros are doing these days. But the fastest people are averaging around 10 seconds it seems. If pairing corners adds about 2 seconds, that's a pretty damn fast method. I'd be surprised to see something notably faster.