"Is that in character or out of character?"
Whilst it's good to try to catch these issues before they come up in a session 0, some things are not apparent until the game is running. It is impossible to prepare for and anticipate everything, and this situation to me seems like exactly the sort of thing that a session 0 could miss, and needs to be handled on-the-fly when it comes up in play.
Whenever I'm not sure of conflict between players is between the players, or between their characters (and the players are fine with it), I'll ask them. In your case, I would recommend:
P1: I don't want to be picked up!
DM: Is that in character or out of character?
DM: I mean, is that you saying you're not happy with this, or is it just what your character thinks?
This can go one of two ways. Either the player says: "Oh, this is just my character, I'm cool with it, but X wouldn't be!" in which case no problem, carry on, roll strength checks, etc.
Or the player says: "I don't want my character to just be picked up all the time just because I'm small". Now you know this is the player objecting. You might not need to say anything else. The other player (your wife in this case) would likely react with apologies, the "bad thing" never happens (i.e. is retconned), and now everyone is a little clearer on what is and is not ok.
It might be worth having a conversation afterwards to make sure everything is fine, it depends on whether you feel it is necessary depending on how well things seemed to recover in the session.
But what do I do now?
In your situation, the thing to do next, whether you want to invite this player back into the game or not, is to talk to this offended player. Admit that you didn't realise they were offended, not just roleplaying their character being offended.
If you want to invite this player back into the game, offer to discuss ways with the group (including P1) to signal when things bother you out of character, since it's all too easy to assume everything is in character. At my physical table, we use the "time out" hand gesture, but this doesn't work online when you only have your voice, so it might be as simple as just stating "out of character"; or stating "in character" before every in character dialogue. If these terms are agreeable, maybe P1 can rejoin the game and things can continue. If not, then maybe it wasn't such a good fit after all...