There are no "he can't do this to me can he?" issues here. Almost everything is not illegal for a boss to do to a worker, particularly in a non-union atmosphere. So yes, he could do it. But gosh, it'd be profoundly stupid of him. You're not a bought and paid for galley slave or anything. If you have the ability to get a better job, does he really think you shouldn't?
If this comes to pass, instead of just threats you heard about, I suggest you talk to your father in law. If the new job is a better paying one, with better potential for advancement, why would he NOT want you to take it, make things better for his daughter?
And if he doesn't want you to leave, why, instead of threatening to punish you and make you much more motivated to leave by docking your pay and demoting you, would he not offer to match what you'd be getting on the new job, keep you and keep you and him happy?