Do I infer that "traffic jam" in fact means "lots of phones round here"? & relies on drivers leaving their phones properly on whilst driving.
It's a bit cleverer than that, and I'm not convinced that the proposed method would actually work. It can presumably tell the difference between a bus stop (lots of phones moving together then stopping) and a traffic jam (lots of phones, moving like cars, that have stopped in a queue)...
Androids tend to default to sharing location data with google most of the time, so if by "properly on" you mean "switched on and with a network connection" then yes. I drive with my phone in that state all the time. Sometimes it even rings or makes other notification sounds, which I ignore because I'm driving. I certainly wouldn't faff about powering it down just because I was about to drive.