Given that the universe is expanding because space itself is expanding, is that expansion occuring in all places and on all scales? Consider a photon emitted from a source billions of years ago. As it travels, space is expanding all around it. If that photon is unchanging, wouldn't that mean that its apparent wavelength is decreasing relative to the expanding space it is travelling through? And wouldn't that imply that light from distant objects should be blue-shifted to some degree (or at least slightly less red-shifted than would be consistent with relative motion between source and observer)?
Oversimplifying a little, the answer is that expansion can occur on any scale, but it doesn't occur for tightly bound systems. See this question: Can the Hubble constant be measured locally?
You have this backwards. If you like, you can interpret cosmological redshifts as expansions of the space occupied by electromagnetic wave-packets. In this description, cosmological expansion doesn't decrease the wavelength, it increases it.