Thatch is the layer of dead roots and stems that accumulates over time at the soil surface.   KY bluegrass lawns growing on compacted clay soils often become "thatchy".  Core aeration pulls out plugs of soil and thatch that accumulates at the soil surface.

When thatch accumulates to 1/2 inch thick or thicker layers (as in photos below), it can inhibit water movement into the soil.   Regular and thorough core aeration controls thatch buildup.  Plan on thorough core aeration (multiple passes so that core holes average 2-3 inches apart) every spring (April-May) or fall (Sept).  Both times would be good if your lawn gets lots of foot traffic and the soil is clayey.
Leave the plugs/cores in place on the lawn surface if possible.    See also: http://www.ext.colostate.edu/pubs/garden/07202.html