Thatch is a layer of living and dead organic matter between your grass and soil surface.  Thatch over 1/2" thick is considered a problem and should be corrected.  Excessive thatch creates a breeding ground for turf damaging insects and disease.  Thatch blocks water and nutrients from getting to the root of grass plant, starving it.  Too heavy of nitrogen applications and overwatering can lead to thatch.  Thatch happens when grass grows faster than it can decompose.  In most cases thatch can be corrected with core aerification, but in some cases when thatch is really thick, the turf needs to be de-thatched with a special raking machine.