Good question. I looked it up and here is what I found:
Real-time traffic data is compiled by a traffic-information provider, then broadcast over a radio frequency to equipment set up to receive it. Depending on the equipment you have, you'll subscribe to a service that's broadcast over terrestrial FM, or to one that's broadcast along with satellite radio signals. Many new portable navigators now include this real-time traffic info for free. Traffic information doesn't interfere with FM or satellite radio reception, so you can continue to listen to either source while you receive traffic signals.
The traffic information comes from a variety of sources, including commercial traffic data providers, departments of transportation, police and emergency services, road sensors, traffic cameras, and even aircraft reports. This information is compiled and delivered via radio frequency (FM or satellite) to your navigation system. These providers work with the two main companies behind map data for the U.S., Tele Atlas and NAVTEQ?, to deliver accurate representation of traffic data on GPS map displays.